－139－ Chapter IV External economic policy challenges in the 21 st century The strains accompanying world economic growth which were examined in the previous chapter are a warning sign regarding the current market economy-based world economic system. The causes and effects of the various issues pinpointed in Chapter III need to be carefully analyzed. And if proper recognition are not given to the risk that in the absence of a serious response to these issues, the credibility of the world economic system per se could be lost. However, at least at present, no alternative exists which could completely replace the current market-based system. The only course currently open to us, therefore, is to work with the system we have, minimizing any damage while operating appropriate economic policies. At the same time, where Japan devoted the late 20 th century to dealing with the external frictions created as a result of the recovery and subsequent muscular growth of the national economy, the 21 st century will pose a new challenge—the active construction of domestic and international systems geared to the rapid advance of globalization. Formerly, the standard approach was to develop the domestic business environment using domestic economic policy, with the overseas business environment addressed through external economic policy. Now, however, as domestic issues take on prominence as international issues while international issues impact as far as the domestic environment, the need is for integrated domestic and external economic policies which constantly refer back to both domestic and international conditions. This will mean creating organic linkages between domestic and external economic policies to develop a market environment balancing the domestic and international levels and stimulate the Japanese economy. In other words, in working to boost the Japanese economy, it is becoming increasingly important that Japan not only further promote policy coordination among states, as exemplified by the traditional coordination of macroeconomic policies, but also optimize the synergy between its domestic and external policy. To these ends, Japan is already shifting its external economic policy toward the multi-layered utilization of regional, bilateral and other fora, while retaining its traditional focus on multilateral frameworks 1 . Realizing multilateral trade liberalization, however, will remain a necessary condition in ensuring that Japan enjoys optimum benefit from free trade. The drive behind the policy shift is to make multi-layered and flexible use of the various fora as part of the process in reaching this ultimate goal. 1 Promotion of multi-layered trade policy was discussed in the White Paper on International Trade 2000 (MITI), while the White Paper on International Trade 1999 (MITI) refers to the need for regional integration efforts from the perspective of supplementing the multilateral trading system.
Transcript
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Chapter IV External economic policy challenges in the 21st century The strains accompanying world economic growth which were examined in the previous chapter are a warning sign regarding the current market economy-based world economic system. The causes and effects of the various issues pinpointed in Chapter III need to be carefully analyzed. And if proper recognition are not given to the risk that in the absence of a serious response to these issues, the credibility of the world economic system per se could be lost. However, at least at present, no alternative exists which could completely replace the current market-based system. The only course currently open to us, therefore, is to work with the system we have, minimizing any damage while operating appropriate economic policies. At the same time, where Japan devoted the late 20th century to dealing with the external frictions created as a result of the recovery and subsequent muscular growth of the national economy, the 21st century will pose a new challenge—the active construction of domestic and international systems geared to the rapid advance of globalization. Formerly, the standard approach was to develop the domestic business environment using domestic economic policy, with the overseas business environment addressed through external economic policy. Now, however, as domestic issues take on prominence as international issues while international issues impact as far as the domestic environment, the need is for integrated domestic and external economic policies which constantly refer back to both domestic and international conditions. This will mean creating organic linkages between domestic and external economic policies to develop a market environment balancing the domestic and international levels and stimulate the Japanese economy. In other words, in working to boost the Japanese economy, it is becoming increasingly important that Japan not only further promote policy coordination among states, as exemplified by the traditional coordination of macroeconomic policies, but also optimize the synergy between its domestic and external policy. To these ends, Japan is already shifting its external economic policy toward the multi-layered utilization of regional, bilateral and other fora, while retaining its traditional focus on multilateral frameworks 1 . Realizing multilateral trade liberalization, however, will remain a necessary condition in ensuring that Japan enjoys optimum benefit from free trade. The drive behind the policy shift is to make multi-layered and flexible use of the various fora as part of the process in reaching this ultimate goal. 1 Promotion of multi-layered trade policy was discussed in the White Paper on International Trade 2000 (MITI), while the White Paper on International Trade 1999 (MITI) refers to the need for regional integration efforts from the perspective of supplementing the multilateral trading system.
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In Section 1 of this chapter, the current state of and major issues facing the Japanese economy are outlined, followed by an examination of the various types of policy issues presented by the challenge of boosting the attractiveness of Japan’s business environment as an example of integrated domestic and external economic policies. Section 2 considers key issues and problems in building and harmonizing international systems amid the advance of globalization and the convergence of domestic and foreign markets. Finally, in Section 3, changes are identified in the socioeconomic environment in which Japan’s external economic policy is situated. After considering the need to make multi-layered use of multilateral, regional and bilateral fora, the chapter closes with an analysis of the current state of Japan’s efforts in these various fora, as well as the challenges that lie ahead. Section 1 Need for integrated domestic and external economic policies
【【【【Key points】】】】
1. Need for integrated domestic and external economic policies The occlusion currently being experienced by the Japanese economy is a result of Japan’s failure to react promptly to changes in the external environment such as (1) market maturation, (2) fiercer competition as a result of the advance of globalization and informatization, and (3) other countries’ progress with structural reform. The essential cause lies in Japan’s declining ability to innovate to meet new challenges, a decline which is rooted in Japan’s long experience with economic success in the half-century since the war. To restore the flexibility and dynamism the Japanese economy requires to respond to the above changes, domestic economic policy and external economic policy need to be teamed together to develop a market environment which harmonizes the domestic and external levels and to initiate immediate structural reform. 2. Active use of FDI to promote structural reform Inward direct investment is a valuable means of stimulating the Japanese economy through the promotion of competition and spread of technology; further, the scale of such investment is also one barometer for measuring the attractiveness of Japan’s business environment. Because the amount of inward direct investment is determined by multiple factors, including savings levels and the degree of industrial agglomeration, it is difficult to evaluate through international comparisons; however, Japan receives only a 20th of the FDI absorbed by the United States. Japan’s inward direct investment also comprises a mere 0.3 percent of gross domestic fixed capital formation, an extremely low level compared to the world average of 11.1 percent. While various suggestions have been made as to what Japan needs to do to promote inward direct investment, the most critical steps will be: (1) to enforce more stringent auditing of accounts as a means of boosting the reliability of corporate information; (2) to undertake a systemic review toward facilitating business reorganization; and (3)
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to develop the business environment to allow the flexible participation of foreign directors and stockholders in company management. 3. Importance of dialogue with the market and development of the investment environment through use of external economic policy The worldwide growth of direct investment in recent years has spurred moves to develop investment-related multilateral and bilateral rules. In terms of multilateral investment rules, achievements to date include conclusion of the TRIMs Agreement and the GATS, while investment treaties have also been concluded at the bilateral level to protect and promote investment. In addition, recent free trade agreements have contained various measures to facilitate the flow of goods, money and people, and to promote investment both directly and indirectly. To encourage direct investment in Japan, the government will need to reform domestic systems and use the above kind of external economic policies to ensure the efficient improvement of Japan’s business environment. Promotion of inward direct investment will also require that the policy messages communicated by the government receive the approval of foreign investors and companies and lead to actual investment. Operating economic policy which successfully integrates both the domestic and external will be an effective means of communicating to the market a consistent policy direction and Japan’s commitment to structural reform. 1. Need for integrated domestic and external economic policies (1) The stagnating Japanese economy Throughout the 1970s and 80s, Japan had the highest real GDP growth rate and per capita real GDP growth rate (in the three-percent mark) of the five developed countries (Fig. 4.1.1). This situation underwent a turnaround in the 1990s, however, with the real GDP growth rate slipping from the four-percent to the one-percent mark, and the per capita real GDP growth rate sliding from the three-percent to the one-percent mark. Moreover, the labor productivity growth rate dropped to half the 2.6 percent level of the 1980s to reach 1.3 percent in the 1990s, the lowest level among the five developed nations (Fig. 4.1.2).
Figure 4.1.1 Trends in economic growth rates in the five major developed countries 1970-80 1980-90 1990-98 1999 1970-80 1980-90 1990-98 1999
Figure 4.1.3 Corporate bankruptcies in Japan and the total value of corporate bankruptcy debtNo. of corporate bankruptcies
0
5,000
10,000
15,000
20,000
25,000
1970 1975 1980 1985 1990 1995 2000
(No.)
(Year)
0
5
10
15
20
25
Dec-70 Dec-75 Dec-80 Dec-85 Dec-90 Dec-95 Dec-000
500
1,000
1,500Total corporate bankruptcy debtvalue (trillion yen)Average debt value (million yen)
(Trillion yen)Total corporate bankruptcy debt value and average
Total corporate bankruptcy debtvalue (left scale)
Average debt value (right scale)
(Million yen)
(Year)
Company bankruptcies increased in the 1990s following the collapse of the bubble economy, declining in 1999 only to rise again in 2000 to close to 20,0002 (Fig. 4.1.3). The recent surge in large-scale bankruptcies has also boosted the level of debt per corporate bankruptcy, topping over 1.27 billion yen in 2000 to reach a new high, while total corporate bankruptcy debt hit a record level at around 24 trillion yen. The annual average unemployment rate for 2000 was 4.7 percent, 4.9 percent for December, again both record levels3. In terms of stock prices, TOPIX has been sliding since spring 2000, while the Nikkei Stock Average4 undercut the lowest prices of the post-bubble period on 22 February 20015, and then broke through the 12,000 yen floor on 13 March for the first time in 16 years6. These figures reflect continued widespread market uncertainty over the prospects for the Japanese economy (Figs 4.1.4, 4.1.5).
2 The 18,769 bankruptcies recorded in 2000 represented the fifth highest postwar level. 3 The highest level since 1953, when unemployment surveys were first conducted. 4 Note in regard to the March Nikkei Stock Average that the 24 April 2000 changeover in stocks has resulted in the loss of continuity. 5 Value during trading hours. 6 The closing price on 13 March was 11,819 yen, the lowest since 28 January 1985.
1.0
2.0
3.0
4.0
5.0
1970 1975 1980 1985 1990 1995 2000
(%)
Source: Labor Force Survey (Management and Coordination Agency).
Figure 4.1.4 Trends in Japan’s unemployment rate
(Year)
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-40 -20 0 20 40
Shortage Excess
Note: Fourth quarter of 2000, production and business facilities DI, Tankan.Source: Tankan (Bank of Japan).
Figure 4.1.6 Excess and shortage in production andbusiness
(2) Factors behind economic stagnation Factors behind the sluggishness of the Japanese economy in the 1990s included: (1) weak demand as a result of financial system uncertainty and the reverse asset effect accompanying the collapse of the bubble economy, creating a substantial, long-term supply and demand gap, and (2) severe excess capacity arising in many industries, with slow progress made in reallocating management resources 7 (Fig. 4.1.6).
7 New Growth Policy Committee, Industrial Structure Council (2001).
(10,000 yen)Figure 4.1.5 Trends in Japan’s stock prices
（Note: The Nikkei Stock Average covers monthly averages, TOPIX end-of-month values. It should also be notedthat Nikkei Stock Average issues were changed on 24 April 2000.Source: Nihon Keizai Shimbun (Nihon Keizai Shimbun, Inc.), Tokyo Stock Exchange Monthly Statistics (TokyoStock Exchange).
(4 January 1968 = 100 points)
Nikkei Stock Average (right scale)
TOPIX (left scale)
(Year)
Textiles Wood and wood products. Paper and pulp Chemicals Oil and coal products Ceramics and cement products Iron and steel Non-ferrous metals Food Metal products General machinery Electrical machinery Transport machinery Precision machinery Other manufacturing Construction and real estate Retail and wholesale Transport Communications Electricity and gas Services Leases Other non-manufacturing
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However, one of the root causes of the problems facing the domestic economy is Japan’s failure to adapt to the dizzying pace of change in the external environment. Three particularly major recent changes are outlined below. (a) Market maturation and changes in the supply and demand structure The many products which economic development has brought to the market have reduced the number of areas in which supply shortages have created strong demand to a handful of goods such as IT-related products (Fig. 4.1.7). This change in the supply-demand structure has brought an end to an era in which everything that was made sold, spurring a shift from business models based on producers’ perspective to models based on consumer perspective. In other words, business survival now depends on seeking the development, production and sale of products which will stimulate buying interest on the part of over-sated consumers and boost customer satisfaction. While some Japanese companies are adapting flexibly to business models geared to these structural changes in the market, many have yet to break away from more traditional business models.
Figure 4.1.7 Trends in dissemination rates for main home electronic appliances and no. of appliances domestically produced
0
25
50
75
100
65 70 75 80 85 90 95
Vacuum cleaners
（％）
Color TVs
Microwave ovens
CD players
Computers
VTRs
Refrigeratorswashingmachines
Air conditioners
Domestic
SatelliteTV
reception
(year)
0
10,000
20,000
30,000
40,000
50,000
60,000
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
(1,000 appliances) No. of domestically produced
VTRs
Color TVs
Mobile phones
(year)
Taperecorders
Note: The number of domestically produced appliances is the moving average value over three quarters.Sources: March 2000 Survey on Consumer Trends (EPA), Machinery Statistics Yearbook (METI).
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(b) Globalization and informatization intensify competition Globalization and informatization have increased the number of potential rivals for domestic companies, boosted transaction speed, and reduced market information uncertainty. For consumers, this means being able to draw on a rich supply of information to speedily select the most appropriate product for one’s needs in terms of price, quality and purchasing method. As a result, cross-border competition has become even more intense, lending a clear advantage to companies which have built business models adapted to these changes in the business environment and are accordingly able to meet the needs of domestic and international customers with greater speed and accuracy. The term “competition” as used here tends to be given a rather non-humanitarian spin. However, this kind of competition is arising not from globalization, informatization or strategic efforts by foreign companies so much as from daily consumer choice. Countless numbers of consumers are making choices every day in favor of goods and services offering better quality and performance at a lower price. The essence of business is to provide products with value from a consumer perspective based on this principle of consumer behavior, with companies absorbing the responsibility and risk entailed. Competition also benefits consumers in that it allows only those goods and services meeting consumer needs to survive on the market, while from the perspective of suppliers too, the pressure to constantly reform and remake which competition applies is a vital element in strengthening corporate constitutions. Figure 4.1.8 compares the degree to which Japanese industry is sheltered from international competition with the degree of productivity (added value per staff member), from which it is evident that those industries exposed to international competition are achieving higher productivity levels.
Figure 4.1.8 Relation between degree of competition and
Note: The average tariff rate for each industry was estimated by calculating the share of tariffincome in import value.Source: Various editions of Input-Output Table (Management and Coordination Agency), SeasonalReport on Corporate Statistics (Ministry of Finance).
Average tariff rate (1995)
Per capita added value (1998, million yen)
FoodsTextile industry
Other manufacturing industries
Wood and wood products
Pulp, paper and paper products
Printing and publishing
Chemical industry
Ceramics and cement products
Iron and steel
Non-ferrous metals
Metal products
General machinery
Electrical machinery
Transport machinery
Precision machinery
Apparel and other textile products
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0％ 2％ 4％ 6％ 8％ 10％ 12％ 14％
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(c) Progress abroad with structural reform Other developed countries, particularly the United States and the United Kingdom, have been pushing forward with a variety of structural reforms since the early 1980s with the aim of creating a competitive environment, while radical restructuring has also been taking place at the corporate level. As a result, these countries have restored their economic vitality, achieving higher growth rates than Japan in the 1990s8. Economic progress and the development of market environments have also led the developing countries to boost their industrial competitiveness 9 , with Japanese industry now coming up against strong rivals from these quarters10. As of the late 1980s, Japan too has been moving forward with deregulation-centered structural reform and corporate restructuring, but by comparison with its rivals, these efforts remain too limited and too slow. The fact that Japan has failed to react promptly to the major changes taking place in the external environment, or to undertake the necessary self-reform, is one of the reasons for Japan’s current standstill. Why has Japan been so slow to reform itself? The answer lies in the experience of success deriving from Japan’s economic growth over the half-century since the war11. Japan’s strong post-war growth dipped below zero in response to the first oil shock, but the energy-saving and higher productivity engendered by the crisis subsequently opened the way for stable growth right through to the collapse of the bubble economy in the 1990s. At the same time, continued success seems to have gradually rigidified systems and approaches, reducing Japan’s ability to make itself anew. In particular, amidst the dizzying speed at which the external environment is changing, a marked discrepancy is emerging between the performance of those countries and companies able to respond to change with flexible system innovations and those whose systems have become set in stone12. The dramatic transformation of the outside world even as Japan loses its ability to self-transform induced a steep drop in Japan’s international competitiveness in the 1990s. For example, according to the “potential competitiveness”13 ranking created 8 See Fig. 4.1.1 concerning US and UK growth rates, the White Paper on International Trade 2000 (MITI) concerning systemic reform and its effects in other developed countries. 9 One factor boosting the competitiveness of developing countries could be described as the advantage of the follower”—in other words, when economic progress and market development in these countries result in the participation of low-cost, abundant labor in a market economy, they absorb the latest corporate facilities and technologies which are transferred from developed countries. 10 Refer to Chapter I concerning the current state of intensifying competition in Asia. 11 Christensen (1997), Nakanishi (1996). 12 As noted in Section 2, Chapter II, in terms of an international comparison, while Japanese companies are making greater use of IT to boost the efficiency of existing business, a limited percentage of companies have taken the opportunity of IT introduction to reform their management strategies. This is another reflection of Japanese companies’ limited ability to adjust to changes in the external environment. 13 Potential competitiveness is not an economic growth indicator, but focuses on whether the foundations are in place for building greater competitiveness. An analysis is made based on eight chief elements—international trade and finance; companies; education; domestic finance; government; science and technology, infrastructure; and IT—to produce an overall evaluation.
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First Second Third Japan’s rankingOverall ranking US Singapore Netherlands 16thInternational finance and trade Finland US Hong Kong 13thEnterprises Netherlands US Hong Kong 10thEducation Canada Australia Finland 25thDomestic finance Switzerland Hong Kong Australia 13thGovernment Singapore New Zealand Hong Kong 7thScience US Japan Germany 2ndInfrastructure Finland Singapore Switzerland 13thIT US Norway Iceland 14thSource: Japan Center for Economic Research (2000).
Figure 4.1.9 National potential competitiveness rankings（2000）
by the Japan Center for Economic Research last year, where Japan stood at fourth place in 1980 and third place in 1990 in terms of overall ranking, its 2000 ranking had fallen as far as 16th place14 (Fig. 4.1.9). However, Japan’s current economic slump has also been experienced in other major developed countries. For example, the United States recorded negative growth in 1980, 1982 and 1991, not to mention an unemployment rate of more than nine percent in 1982 and 1983. The United Kingdom too saw negative growth in 1980 and 1981, and again in 1991, with the unemployment rate topping 10 percent from 1983 through 198615. As noted above, both countries instituted sweeping structural reforms in order to break free of economic stagnation, boosting their ability to adapt to external changes so that they were able to shake themselves out of their standstills. As explained earlier, Japan’s long prosperity has probably made it that much more difficult to break out of the current rut. However, there is no reason to suspect that Japan does not have the same latent capacity to transform itself in the way that other countries have done. To realize that capacity, of course, it will be vital that Japan too engages immediately in the following steps to develop a competitive market environment. (3) Need for integrated domestic and external policies To deal with the immediate issue of boosting Japan’s ability to remake itself, a competitive market environment needs to be created which will encourage the self-transformation efforts of players in all markets, including manufacturing, capital and labor16. Formerly, the domestic business environment was regarded as the province of domestic economic policy, with the international business environment tackled using external economic policy. As domestic and international markets converge, however, with goods, money and people moving freely beyond borders and companies too
14 IT was added as an evaluation criteria as of the year 2000 survey, breaking the continuity between 1999 and 2000 rankings. Where continuity is maintained by excluding IT from the survey, Japan ranks 15th. 15 EPA (2000). 16 According to trial calculations by MITI and Sanwa Research Institute (2000), producing satisfactory results from economic structural reform measures will result in an economic effect of around 140 trillion yen over the next decade (the equivalent of a 2.4 percent rise in annual GDP).
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becoming increasingly transnational, the form taken by domestic economic policy and systems is also impacting on the actions of foreign economic entities, while, conversely, international systems have the potential to affect the actions and competitiveness of economic entities at home. To develop a competitive domestic market, therefore, Japan needs to implement a new form of economic policy which brings together both external and domestic policy with constant reference to the actions of domestic and international economic entities. More specifically, this will entail creating organic linkages between domestic and external economic policy as a means of developing a market environment with a good domestic-international balance, and ultimately boosting the Japanese economy. For example, rule-making under the General Agreement on Trade in Services (GATS), as well as the conclusion of FTAs and EPAs17, would provide an opportunity to review both Japan’s and other countries’ business environments, while also promoting actual business environment development. Using this kind of external economic policy to supplement domestic structural reform efforts would, therefore, heighten the synergy between domestic and external policy. At the same time, to ensure that Japanese companies can enjoy the benefits of systems with a good domestic-international balance, the creation of domestic systems needs to be pursued with an eye to developments in international standards. In addition, to develop rules originating in Japan into regional and international standards, Japan needs to move quickly, keeping in mind future international rule-making right from the point of developing domestic systems. To recap, to develop a market environment with a good domestic-international balance as a step toward achieving the ultimate goal of stimulating the Japanese economy, external and domestic policy must be regarded as symbiotic components, with the government moving forward powerfully through the balanced development of these twin elements. 2. Active use of inward FDI to promote structural reform One effective means of stimulating the domestic economy will be to promote inward FDI, encouraging the dissemination of technology and management know-how and spurring competition. Inward FDI is also a barometer measuring the attractiveness of Japan’s business environment. The Japanese government has actively encouraged investment in Japan on the grounds that such inward FDI expands employment, facilitates the absorption of new technology and management know-how (see Column 8), and brings greater benefit to consumers by promoting healthy competition18. The following sub-section analyzes direct investment in Japan and
17 Bilateral agreements aimed at building greater solidarity across the economy as a whole, going beyond the mutual tariff reductions which are the hallmark of traditional FTAs to address the facilitation of movement of natural persons, e-commerce and a wide range of other areas. There are, however, agreements officially entitled FTAs even where they encompass such new areas. The White Paper therefore treats all agreements already agreed among third countries as FTAs even where new areas are included. 18 According to a report by the Japan Investment Council Expert Committee (1999). The Council
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provides an international comparison, going on to consider policy issues in further promoting inward FDI. (1) Current state of direct investment into Japan The worldwide boom in cross-border M&As led to a swift surge in direct investment in Japan as of the late 1990s, lifting inward FDI from the one trillion mark (1.3404 trillion yen) in FY1998 to above two trillion for the first time in FY1999 (2.3993 trillion yen; report/notification basis). The first half of FY2000 (April-September) too reached a half-year record of 1.8901 trillion yen, with this momentum expected to continue (Fig. 4.1.10)19. Looking at the amount of investment absorbed per industry, machinery (including transport machinery) led the way in the case of manufacturing, while the stars of the non-manufacturing sector have been communications and finance, which have seen heavy regulatory reform in recent years. As of 1994, non-manufacturing has consistently attracted more inward FDI than manufacturing. Incidences of large-scale investment since FY1999 include Renault’s capital participation in Nissan and GM’s buy-up of Fuji Heavy Industries in the manufacturing sector, and investment by French insurance major Assurance AXA in Japanese group life insurance, LTCB Partners’ acquisition of the Long-Term Credit Bank of Japan, and the Vodafone Group’s capital participation in Japan Telecom in the case of non-manufacturing20.
Note: Report/notification basis.Source: Inward Direct Investment Report (Ministry of Finance).
Figure 4.1.10 Trends in inward direct investment in Japan by industry
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(Investment value: \100 milllion) (Investment value per project: \100 million)
was launched in July 1994 and is headed by the Prime Minister. 19 The second half of FY2000 is also expected to reach the same level as the previous year on an annual base given such major-scale investments as the Vodafone Group’s capital participation in Japan Telecom, Daimler Chrysler’s capital participation in Mitsubishi Motors, and GM’s additional investment in Suzuki Motor Corp. 20 Drawn from various editions of MAAR (monthly information magazine on M&As), RECOF Corp.
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Looking at accumulated inward direct investment (FY1999-first half of 2000) according to more detailed industrial breakdowns, investment in the top six areas
from finance and insurance through to chemicals accounts for more than 90 percent of total investment (91.4%), with the remaining 11 areas absorbing less than 10 percent (Fig. 4.1.11). Investment has concentrated in the six top areas because of the investment growth accompanying deregulation in the areas of finance, insurance and communications and the global reshuffling of the automobile and other industries, as well as investment in industries such as chemicals and medicine aimed at building corporate strength through scale merit. (2) International comparison of inward FDI levels Although direct investment in Japan has shot up in recent years, it is still extremely limited compared to inward FDI levels in other countries (amount of investment and share of foreign investment in gross domestic fixed capital formation) (Fig. 4.1.12). Because the amount of inward FDI is determined by multiple factors, including GDP, wage levels and the degree of industrial agglomeration, it is difficult to evaluate through international comparisons; however, UNCTAD statistics (2000)
21 suggest that Japan received only 1.5 percent of total world inward FDI in 1999, less than a 20th of the FDI absorbed by the United States22. Japan’s inward FDI also comprises a
21 Disparities between UNCTAD statistics and the Ministry of Finance statistics given earlier are because (1) UNCTAD figures are on a calendar-year basis, whereas MOF figures are based on the fiscal year (April through March); and (2) MOF figures are based on reports and notifications, whereas UNCTAD figures use an actual and net base (subtracting upward revisions). 22 The US absorbs 31.8 percent of world inward FDI, while the 15 EU countries absorb 35.2 percent.
90
103
143
252
633
701
711
925
1,114
1,505
2,251
7,447
11,123
12,675
16,442
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0 5,000 10,000 15,000 20,000 25,000
Construction
Glass and cement products
Textiles
Transport
Other services
Food
Rubber and leather products
Oil
Real estate
Metals
Real estate
Chemicals
Communications
Services
Trade
Machinery
Finance and insurance
(100 million yen)
Figure 4.1.11 Cumulative value of inward direct
Note: Report/notification base, 1990 through the first half of 2000.Source: Inward Direct Investment (Ministry of Finance).
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Source: WIR (UNCTAD) .
Figure 4.1.12 International comparison of inward FDI received
0.3%
5.5%
12.9%
17.6%
7.3%
12.8%
18.8%
5.1%
11.0%
25.7%
45.0%
51.3%
55.2%
59.8%
15.3%
10.9%
11.1%
0% 20% 40% 60% 80%
Japan
Korea
China
Singapore
Australia
US
Canada
Germany
France
UK
Ireland
Finland
Netherlands
Sweden
EU average
Developed country average
World average
(Inward FDI/ domestic gross fixed capital formation)
10,340
40,400
6,984
5,422
25,061
39,101
82,182
3,192
3,023
275,533
59,96833,785
26,822
18,322
12,741
0 100,000 200,000 300,000
Japan
Korea
China
Singapore
Australia
US
Canada
Germany
France
UK
Ireland
Finland
Netherlands
Sweden1998 1999
(US$ million)
(Inward FDI: US$ million, flow base) (Share of inward FDI in domestic gross fixed capital formation, 1998
Figure 4.1.13 Contribution of foreign affiliates to production, employment and R&D
JapanForeign affiliates’ shareof production (1995,manufacturing industry)
Workers employed byforeign affiliates (1996)
n.a.
n.a.
58.5%
40.6%
39.6%
33.6%
16.1%
11.8%
16.1%
24.2%
28.7%
2.7%
7.7%
11.4%
8.9%
8.9%
7.4%
16.1%
14.7%
15.2%
40.9%
0.9%
20.1%
13.6%
0% 20% 40% 60% 80% 100%
Canada
Ireland
Netherlands
UK
Australia
Germany
France
Sweden
US
Finland
JapanForeign affiliates’share of R&Dexpenditure (1997)
Share of patentsjointly acquired withforeign inventors(1993-95 average)
(Internationalization in technological fields)(Foreign affiliates’ share of production and employment)
mere 0.3 percent of gross domestic fixed capital formation, an extremely low level compared to the developed country average of 10.9 percent and the world average of 11.1 percent. As a result, utilization and contribution of foreign capital in terms of production, employment and R&D remains limited. In other developed countries with greater volumes and higher ratios of direct investment, foreign capital is playing a major role in these areas, creating an environment in which domestic companies and foreign affiliates compete and co-exist with each other (Fig. 4.1.13). The current worldwide rise in FDI has been powered by a boom in cross-border M&As, with the scale of world cross-border M&A transactions accounting for more
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Emphasis on speedymarket entry andacquisition of managementresources
With internationalization, informatization, and shorter product life-cycles, corporate investment activities need to be faster than ever.Rather than green-field investment, companies are using M&As as ameans of efficient acquiring tangible and intangible assets such aspersonnel, production lines, client data, distribution networks andknow-how.
Responding to M&As byrival companies
In mature industries where market expansion is limited, because anM&A by one company gives that company a scale advantage over itsrivals, rival companies generally follow suit by finding other M&Atargets to restore the balance.
Stronger corporategovernance
International permeation of corporate governance with an emphasis onstockholders has given M&As a strategic importance in that they offerhigher stock prices in a short period of time.
The entry into force of the WTO’s GATS and TRIMs eliminated orrelaxed discriminatory regulations and investment restrictionmeasures. The consequent deregulation and privatization conducted bythe major developed countries since the 1990s has created a freer,more predictable, transparent and stable environment for internationalbusiness activities, promoting cross-border M&As.
Source: JETRO (2001a).
Figure 4.1.14 Background to the increase in cross-border M&As
Figure 4.1.15 Total inward FDI value and total M&A value
720,109
865,487
0
250,000
500,000
750,000
1,000,000
94 95 96 97 98 99
Total M&A value
Total inward FDI value
(US$ million)
Inward FDI (world total)
M&As (world total)
FDI in Japan as a percentage of world inward FDI
Other31.4%
US31.8%
Japan1.5%
EU1535.2%
M&As involving Japan as a percentage ofworld M&A value
Other17.6%
EU1547.8%
Japan2.2%
US32.4%
Note: The above M&A figures are based on UNCTAD (2000) definitions, and exclude portfolio investment of lessthan 10 percent. Because direct investment figures are on a net base, subtracting upward investment revisions,whereas M&A figures are on a gross basis, the percentages of each cannot be compared as such. See Foreword tothe White Paper as to White Paper definitions for the NIEs and the ASEAN 4.Source: WIR (UNCTAD) .
than 80 percent of total direct investment in 1999 (Fig. 4.1.15). The advance of informatization and globalization have exposed companies to an unprecedented degree of international competition, making it vital in terms of corporate management strategy to ensure the swift and efficient acquisition of the various types of management resources when committing themselves to direct investment in foreign markets23. Currently, more than 80 percent of world cross-border M&A capital (80.2 percent in 1999) is absorbed by the US or the EU. Western companies are making bold and pro-active use of M&As to capture the advantage in global competition, whereas only
23 See Fig. 4.1.14 on the background to the surge in M&As.
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just over two percent of this capital (2.2 percent) is directed at Japan. In other words, the highly-limited volume of M&A transactions by foreign companies in Japan by comparison with the West is one reason for the low level of inward FDI in Japan compared to other countries. With firms today moving freely across borders to choose their business locations, the volume of direct investment and M&A transactions has become one measure of the attractiveness of a country’s market. While Japan is currently drawing far less direct investment than other developed countries, Japan’s 100-million-plus population and strong consumer purchasing power suggest that there is room to improve the attractiveness of Japan’s market to domestic and foreign investors starting from its business environment.
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Column 8: Ripple effect of technology and management know-how acquired through direct investment Foreign direct investment provides many benefits for the host country, including job creation, the development of supporting industries, and the promotion of competition. Deserving particular attention is the technology and management know-how spillover effect, whereby the advanced technologies and management know-how in the possession of the investing company are transferred to the host country and ripple out domestically. The technology spillover effect arises where the leading-edge technology and know-how of foreign engineers and managers stimulates domestic R&D, pushing up productivity and improving competitiveness. The degree of impact this effect has depends largely on the capacity of the host country to absorb the technology in question. Despite the opportunity to make contact with sophisticated technologies and know-how, if the local company and local staff lack the necessary absorption capacity, technological know-how will remain within the walls of that company without permeating any further. The technology ripple effect caused by direct investment is therefore particularly important in developed countries which have high education levels and an abundance of skilled workers. Branstetter (2000)24 uses data on direct investment in the US by Japanese companies to conduct empirical research on the technological know-how spillover effect of direct investment25. The resulting analysis supports the existence of a technological ripple effect out from Japanese companies (the investing country) into the US (the host country), with a greater effect produced in cases where the primary objective of setting up in the US was R&D rather than manufacturing. A spillover effect from the US to the investing Japanese companies is also confirmed, suggesting that the ripple effect of technology is not a one-way but rather a two-way phenomenon. Direct investment generally leads technology to spill over into the host country through (1) technical guidance provided to local companies in regard to the goods and services they supply to the foreign affiliate; and (2) the acquisition of skills by workers employed by the foreign affiliate. Technology can be imported from abroad not just through direct investment, but also through (1) reverse engineering, whereby technologies embodied in imported goods are taken apart and analyzed, and (2) the conclusion of technology licensing agreements between domestic and foreign companies. However, direct investment has an edge over these channels in that it entails in-house technology transfer, allowing for the transfer of management techniques and know-how difficult to capture in a manual26.
24 Branstetter (2000). 25 The analysis uses the number of existing patents quoted in patent applications as the proxy variable for the technology spillover effect. If direct investment leads to a technology spillover in the host country, there should be an according increase in citations from patents held by foreign affiliates in host country patent applications. Conversely, if direct investment causes a spillover from the host country to the investing companies, the number of citations of local patents in patent applications by foreign affiliates in the host country should also increase. 26 Conversely, technology spillover channels from direct investment host countries to foreign affiliates include (1) information exchange with local trading partners; (2) access to the technological resources of local companies through mergers; and (3) interaction with top local researchers.
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(3) Issues involved in boosting direct investment in Japan How should Japan develop its business environment in order to draw capital and advanced technology and know-how from abroad and put this to good use? Foreign companies have identified high infrastructure costs as a barrier to direct investment in Japan, as well as the cross-stockholding structure, the impact of the main bank system, emotional resistance to selling a company to a foreign concern, language differences, and a lack of lawyers and experts versed in M&A-related law and paperwork27. In terms of the cross-stockholding structure in particular, more companies have been reviewing their asset efficiency in recent years and selling off cross-holdings unnecessary to their main business, reducing the level from 59.1 percent in 1990 to 45.9 percent in 1999, while the ratio of stock cross-held by foreigners has risen steadily over the same period (Fig. 4.1.16). The following sub-sections focus on three key issues involved in encouraging direct investment in Japan—boosting the reliability of corporate information by ensuring more rigorous auditing; providing an extensive menu of choices for corporate reorganization; and development of the necessary conditions to allow flexible management participation by foreign directors and stockholders—exploring current efforts and considering tasks that lie ahead. (a) Greater corporate reliability through more rigorous auditing The key to smooth negotiations on mergers, acquisitions and capital tie-ups is the swift gathering of highly-reliable information on the management status of the other company. Particularly in the case of cross-border M&As, the information needed to analyze the value of the other company as an investment is drawn primarily from financial reports and used as the basis for decision-making. However, where one country’s accounting standards diverge significantly from international standards, or where investors determine that financial reports are not sufficiently reliable, foreign companies have to go to the effort of acquiring and analyzing accurate information
27 See JETRO (2000).
0%
20%
40%
60%
80%
100%
87 88 89 90 91 92 93 94 95 96 97 98 990%
4%
8%
12%
16%
20%Stable holding ratio
Cross-stockholding ratio
Ratio of stocks held by foreigners
Right scale
Left scale
(Cross-stockholding + stable holdings ratio) (Ratio of stocks held by foreigners)
Figure 4.1.16 Trends in cross-stockholding ratios and ratios of stocks held by foreigners
Note: Unit stock base. “Cross-stockholdings” refers to cases where companies hold each others’ stock. “Stablestockholdings” refers to stocks where at least one of the stockholders or parties whose stock is held is a financial institution.Sources: The National Conference of Stock Exchanges (2000), NLI Research Institute (2000).
(Year)
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from their own sources, which means extra time and extra costs. According to a questionnaire sent out by JETRO to foreign companies based in Japan, the policy which the most companies thought would be effective in improving the Japanese investment environment was requiring corporate information disclosure in line with international accounting standards. The results of the questionnaire clearly indicate the urgent need for a reliable accounting system which allows a swift and accurate grasp of the state of a company’s finances and business activities (Fig. 4.1.17). In response to this growing need, Japan instituted consolidated accounting and cash-flow statements in March 2000, followed by the introduction of market-value accounting for securities and derivatives, etc., in March 2001, taking the first steps toward transition to a fully-transparent system consistent with international standards28. These efforts have been welcomed abroad as contributing to reduced cross-stockholdings, faster corporate reorganization and the promotion of investment in Japan29, but a number of issues have yet to be addressed. For example, boosting the transparency and reliability of the corporate accounting system will require not just improving accounting standards, but also the improvement of the mechanisms for ensuring that accounting is correctly audited and reports in line with established standards. Recognizing this, these issues, such as auditing standards as well as auditing-related systems, are discussed in the Certified Public Accountants Examination and Investigation Board, with a view to expanding and strengthening certified public accountant audits and boosting their credibility30.
28 Market-value accounting will be introduced for “other securities” as of March 2002. See Chapter IV, Section 2.3 for further details on the current state of international harmonization of accounting standards. 29 US Embassy in Japan (2000). 30 For example, the audit system sub-committee under the Certified Public Accountants Examination and Investigation Board Released a report entitled Issues and Reform Directions for
11.1%
15.5%
15.8%
18.3%
19.5%
21.4%
21.6%
45.6%
45.8%
71.4%
0% 20% 40% 60% 80%
Development of stock systems facilitating fund procurement,such as elimination of par value stock
Development of laws concerning unlisted companies
Banning of Temp To Hire
Notification of general stockholders’ meetings and exercise ofstockholders’ voting rights by e-mail
Development of the accommodation environment forforeigners
Introduction of a defined-contribution pension system
Expansion of local government policies for attracting foreigncompanies
Establishment of a comprehensive information provisionmechanism concerning investment in Japan
Introduction of a consolidated tax system
Obligating information disclosure in line with internationalaccounting standards
Figure 4.1.17 Effective policies in improving Japan’s inward investmenti
(b) Review of systems facilitating corporate reorganization Promoting M&A-led direct investment in Japan will require the establishment of a wide menu of options to allow exploration of optimal business modes here for those foreign companies which are reviewing corporate regulations from a global perspective and extending their operations abroad. In recent years, in parallel with deregulation in the various industries, Japan has also been pushing ahead rapidly with development of a range of laws to facilitate M&As and other forms of corporate reorganization, including establishment of a stock-swap/stock transfer system in October 1999, formulation and promulgation of a civil rehabilitation law in April 2000, and establishment of a corporate spin-off law (April 2001)31. There are, however, a number of systemic issues which require further consideration in order to promote flexible direct investment by foreign companies. For example, Japan’s Commercial Code obstructs M&As in restricting the value of a merger in principle to the stock of the surviving company32, and does not allow the cash-out mergers currently popular in the US33. (c) Development of the conditions for flexible management participation by foreign directors and stockholders The growth in capital participation by foreign companies seems likely to expand foreign participation on boards of directors. However, under Japan’s current Commercial Code, resolutions at board of directors’ meetings can only be made by physically holding a meeting and having directors attend, with written exercise of voting rights not admissible34. The US already allows this written proxy voting35, and the suggestion has been made that Japan too should introduce a similar system to facilitate the efficient participation in meetings by directors commuting from overseas36. The exercise of voting rights at general stockholders’ meetings through e-mail and the provision of proxy voting rights (granting of letters of proxy) are also under consideration as further means of facilitating the exercise of voting rights by foreign institutional investors37. Voting through e-mail is already an established practice in
the Auditing System: Toward Greater Certified Public Accountant Credibility on 29 June 2000, raising specific issues such as ensuring the independence of auditing corporations, in-house control and examinations regarding audit certificate work, and an external auditing mechanism. 31 While a consolidated tax system has yet to be introduced, the government is currently engaged in serious consideration toward setting such a system in place as soon as possible. Tax Commission (2000). 32 Except on part of the delivered money due to merger. 33 JETRO (2000). 34 As stipulated in Article 260.2.1 of the Commercial Code. 35 As stipulated in Article 8.21 of Model Business Corporation Act. 36 Sub-committee on New Growth Policy, Coordination Committee, Industrial Structure Council (2000). The American Chamber of Commerce in Japan has also suggested that Japan introduce remote conferences and written consents (American Chamber of Commerce in Japan, 2000). 37 Japan Federation of Economic Organizations has also made recommendations as to the need
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the US, and the UK and Germany are currently working toward introducing the provision of proxy voting rights by electronic means38. The OECD Principles of Corporate Governance also note the importance of smooth participation in stockholders’ meetings and the exercise of voting rights as indispensable elements in achieving corporate governance by stockholding entities39. This sub-section examined policy issues in encouraging inward FDI and the status of considerations on these. In addition, in response to the Action Plan for the Reform and Creation of Economic Structures (December 2000 Cabinet Resolution) 40 , a Cabinet Resolution was passed in March 2001 on introduction of procedures for prior confirmation of the application of laws and ordinances by administrative institutions, aimed at clarifying interpretations of Japan’s laws and ordinances. These procedures will entail private enterprises confirming whether or not a specific action they are about to undertake is in infringement of specific laws and ordinances, with the administrative institution with jurisdiction over the law or ordinance in question providing a written response and releasing that response publicly after a certain period of time. Increasing legal system transparency in this way is important in reducing uncertainty for foreign investors, and should prove effective in promoting FDI. Where this string of systemic reforms encourages greater direct investment in Japan, a true feedback effect should emerge whereby the creation of a competitive environment pushes forward domestic structural reforms, and this progress accelerates further inward direct investment41. 3. Importance of dialogue with the market and development of the domestic market environment through use of external economic policy (1) International investment-related rules and changes in these The worldwide boom in FDI has spurred the conclusion of multilateral, regional and bilateral investment-related rules. To lock in the inflow of foreign capital, advanced technologies and skilled personnel, Japan will need to accompany its
for allowing stockholders to exercise their voting rights through e-mail (Japan Federation of Economic Organizations, 2000). 38 In the UK, a draft directive based on the Electronic Communications Act has been released, while in Germany a bill for the simplification of the exercise of voting rights and registered stocks (Namensaktiengesetz, or NaStraG) is currently under deliberation. 39 OECD (1999b). 40 This resolution stipulates as follows: I.1.(5) Consideration of the introduction of procedures for interpretation of laws and ordinances providing for swift and fair business activities by private enterprises (Japanese version of the “no-action letter”): The introduction in a fashion consistent with Japanese laws and ordinances of procedures to swiftly clarify interpretation of laws and ordinances related to administrative processing by the administrative institutions responsible for said processing, aiming at the swift and fair conduct of business by private enterprises against the backdrop of the advent of the IT revolution, launching consideration of such procedures and implementing them in some areas as of FY2001. 41 Takahashi, Ohyama (2000).
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domestic systemic reforms with improvement of the business environment, supplemented by use of external economic policy, making the country attractive to foreign economic entities. In terms of multilateral investment rules, achievements to date include the WTO’s conclusion of the TRIMs Agreement (Agreement on Trade-Related Investment Measures) and the GATS42. TRIMs provides stipulations on investment measures related to trade in goods, banning, for example, performance requirements such as local content requirements43 and exchange regulations. GATS provides for MFN treatment and transparency for investment in services (the supply of a service through commercial presence), and also stipulates national treatment and market access based on the conditions and restrictions listed in schedules of specific commitments44. Japan has worked actively to commit itself and meet its commitments to additional services industry liberalization within the GATS framework, and in the areas of telecommunications and finance in particular, liberalization in line with the country’s commitments has led to significant expansion in market entry by foreign affiliates45. Parallel with moves to create multilateral investment rules, there has been an international surge of interest in concluding bilateral investment treaties (BITs), as well as in setting up regional and bilateral FTAs which include investment rules46. Japan too has concluded and put into force seven BITs to date (Fig. 4.1.18). These
42 The OECD too conducted negotiations on the Multilateral Agreement on Investment (MAI), intended to lay down high-level investment rules for the developed countries, but these were abandoned in 1998 due to conflicts of national interest. See Chapter IV, Section 2.2 for further details. 43 Investment recipient countries requiring foreign companies establishing themselves locally to buy and use locally-manufactured products. This leads to the arbitrary distortion of international trade. 44 In addition to TRIMs and GATS, the WTO Working Group on the Relationship between Trade and Investment is currently considering the creation of comprehensive and binding multilateral investment rules, but not only is it unclear whether investment will be included in the agenda for the next round, but even where negotiations do take place, these are likely to be severely hampered by conflicts of interest. 45 See Fig. 4.1.10 regarding trends in inward direct investment in Japan’s finance and telecommunications sectors. 46 As at the end of 1999, there were 1,856 bilateral investment treaties worldwide, two-thirds of which were concluded in the 1990s. See Chapter IV, Section 2.2 for details on international investment rules.
Counterpart country (including regions)
Signature Entry into force
Egypt 28-Jan-77 14-Jan-78Sri Lanka 1-Mar-82 7-Aug-82China 27-Aug-88 14-May-89Turkey 12-Feb-92 12-Mar-93Hong Kong 15-May-97 18-Jun-97Pakistan 10-Mar-98 Not yet in forceBangladesh 10-Nov-98 25-Aug-99Russia 13-Nov-98 27-May-00Mongolia 15-Feb-01 Not yet in force
Figure 4.1.18 Bilateral investment treaties concluded by Japan
Notes:1. As at March 2001. Japan is also currently in the process of negotiating BIT conclusion with Korea,Mexico, Saudi Arabia, Vietnam and Indonesia.2. The BIT with Pakistan was deliberated during the 1998 regular Diet session in response to theimpact of Pakistan’s nuclear tests, but was rejected.Source: METI.
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treaties focus not so much on promoting direct investment in Japan as on protecting the outward FDI by Japanese companies47. National treatment for investment permits is, however, being considered as part of negotiations on a Japan-Korea investment treaty, seeking to create a treaty which contributes to investment liberalization in both countries. In addition, as Japan has already provided for national treatment in relation to corporation types and new entry in many business fields, promoting greater domestic market competition will mean supplementing the WTO Agreement and existing domestic laws by harmonizing domestic and foreign systems to facilitate investors’ business activities. For example, to ensure maximum absorption of the latest foreign technology and management know-how through inward FDI, systems will need to be created which facilitate entry into Japan and stays by leading-edge management and engineers with this know-how. In turn, this will mean considering rules on mutual recognition of qualifications and licenses for engineers and personnel providing specialized services, as well as relaxation of entry requirements for engineers and service-providers with specialized knowledge or technology. For example, the recently concluded EU-Mexico FTA (signed in March 2000), as well as the New Zealand-Singapore Closer Economic Partnership Agreement (signed in November 2000), both stipulate the active promotion of mutual recognition of qualifications held by service providers. The report created by the Joint Study Group on a Japan-Singapore FTA (the Japan-Singapore Economic Agreement for a New Age Partnership) in the lead-up to bilateral negotiations refers to the importance of facilitating the movement of personnel in specialized professions, as well as the employment and training of skilled workers48. Another important factor in facilitating investment in Japan by foreign investors will be creating more efficient capital markets. For example, the report created by the above-mentioned Joint Study Group on a Japan-Singapore FTA suggested that bilateral cooperation in financial services should be bolstered, with discussion taking place on financial service regulations, capital market linkage, market infrastructure improvement and the development of a regional bond market49. Review of Japan’s capital markets and market infrastructure development should prove effective means of boosting Japan’s attractiveness as an investment destination.
47 Japan’s BITs to date have included (1) investment liberalization (national treatment in the host country), (2) investment protection (MFN and national treatment in the host country, the right to a trial, unrestricted remittance, compensation in case of national emergencies, etc.) and (3) dispute settlement procedures. 48 Joint Study Group on a Japan-Singapore FTA (2000). 49 For example, discussion touched on (1) the creation of a common securities settlement system through linkages between the two countries’ securities exchanges, and (2) the introduction of an instant settlement system aimed at minimizing foreign exchange settlement risk. The Study Group, recognizing that these ideas needed further careful consideration by experts, relevant institutions and industrial groups, agreed that as discussion had not developed far enough in many areas, it would be useful to hold bilateral consultations between currency and financial authorities in those areas where further substantive discussion would be appropriate.
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Finally, some recent FTAs have also included MRA, e-commerce, competition policy and intellectual property rights, and development of such systems through bilateral and regional efforts should also help to promote inward direct investment50. (2) Importance of dialogue with the market This section has examined the need to absorb advanced management know-how and technology from abroad and promote competition in domestic markets in order to break the Japanese economy free of a long-running recession, highlighting the importance of encouraging inward FDI as a means to this end and identifying domestic and international policy issues. In conclusion, we note the crucial nature of “dialogue with the market” in promoting inward FDI. FDI trends are ultimately shaped by market players, who regard the policies taken by the Japanese government as a message to the market and treat these as an important factor in their investment decisions. To the extent that Japan’s message does not appeal to foreign investors and companies and lead to actual investment, any systemic reform and international rule-making will only be limited in effect. For example, if the government’s commitment to pushing ahead with structural reform is not clearly communicated to the market, or where contradictions emerge between the position taken by Japan in international rule-making and the direction of domestic systemic reforms, uncertainty will arise as to the direction of Japan’s policies and market, which could deter inward FDI. The fact that the amount of inward FDI currently absorbed by Japan is so limited compared to other developed Western countries suggests that not only the shape of domestic systems but also the country’s commitment to structural reform and direction in this regard still lacks sufficient clarity and reliability in the eyes of the market. To promote inward FDI, Japan will therefore need to engage in greater dialogue with the market, bearing in mind the following two points. Firstly, to encourage the inflow of capital, personnel and technology from abroad, Japan should not open its markets as a means of dealing with trade friction (responding to foreign demands for liberalization), but rather push ahead swiftly with innovative system reforms based on its own will and inventiveness. Secondly, both domestic structural reform and international rule-making are valid policy tools in terms of encouraging investors to make their investment decisions in favor of Japan. Policy operation therefore needs to integrate domestic reforms and external economic policy to ensure the effective communication of the government’s message to the market and optimize the synergy effect between the two areas. For example, Singapore’s sudden high growth can be attributed to its success not only in integrating domestic and external economic policy, but also in promoting inward
50 See Chapter IV, Section 3, on items covered under existing FTAs and EPAs, as well as those currently under negotiation.
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direct investment through constant dialogue with the market, allowing it to function as Asia’s hub (see Column 9). Other countries are strategically encouraging inward direct investment as a means of gathering goods, money, personnel and advanced technology and know-how from around the world. Japan too will need to consider future changes in the economic and industrial structure and Japan’s future as part of the structure of international specialization, and, based on the scenarios produced, promote inward direct investment while maintaining a dialogue with the market.
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Column 9: Integrated domestic and external economic policy in Singapore The Singaporean government announced Industry 21 (I21) in June 1998 as a key national strategy aimed at positioning Singapore as an Asian hub by converting to a knowledge-intensive industrial structure and attracting multinationals. Electronics, petrochemicals and chemicals, engineering, life science, logistics, information communications and media, education services and health care services were identified as priority areas in terms of industry fostering, with Singapore seeking to strengthen the competitiveness of these and to draw the participation of multinationals. Singapore also aims to foster domestic companies with the ability to learn from these multinationals in developing their own products and services, setting the objective of growing at least 50 domestic companies to world standard by 2010. Companies to be fostered will be those providing important services for regional headquarters (marketing, supply chain management, product design, distribution, etc.), as well as those able to develop original products and technologies, for which the government is implementing a variety of fostering measures, including government subsidies and tax incentives. To realize this strategy, Singapore has pursued integrated domestic and external economic policies to consistently impress upon the market its commitment and direction in terms of creating markets which are also attractive to foreign companies. Specific tools have included the development of business infrastructure, particularly in telecommunications, deregulation, the development of workers’ skills51, and the conclusion of FTAs with other countries. These efforts have started to reap a steady harvest in recent years. According to a release by the Singapore Economic Development Board52, the Board’s investment incentive policies led to 27 foreign affiliates53 establishing regional headquarters in Singapore in 1999, creating 1,800 new jobs. Fortune has also ranked Singapore top among Asian business environments for the last two years54. The magazine concludes that while business costs are not cheap, Singapore’s merits more than outweigh these costs—in particular, its business infrastructure and transport network, English-speaking workers, efficient administration, and various incentives for foreign affiliates. Singapore was also rated top in the world in 1999 by both the World Economic Forum’s 1999 Global Competitiveness Report and Business Environment Risk Intelligence’s Quality of Workforce Index in terms of its competitiveness and the quality of the labor force. The succession of multinationals moving into Singapore clearly indicates the approval of the market concerning the direction of the government’s strategy, the likelihood of achieving its targets, and the commitment and achievements of the government in regard to reform.
51 For example, Proact 21 (announced December 1999), an employment development program for fostering workers attractive not just to domestic companies but also to foreign affiliates. 52 Singapore Economic Development Board (2000). 53 Eight of these were major companies listed in Fortune Global 500 (Cisco Systems, Unilever, Lucent Technologies, Chevron and Honeywell, etc.). The Board’s incentive policies have to date led more than 180 companies to establish regional headquarters in Singapore. 54 A. Fisher (1999).
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Section 2 The evolution of globalization and institution-building
【【【【Key points】】】】
1. Progress of rule-making to date Looking back over the history of international rule-making since the mid-19th century, what started as the development of rules to facilitate cross-border economic activities such as posts, communications and weights and measures has deepened since the 1980s to address the coordination of domestic institutions. Demands for international rule-making have also expanded from border measures to domestic measures, and from trade to non-trade areas. 2. Rule-making in new areas The key issue in the early 21st century will be building systems in the areas of investment, competition policy and e-commerce, which are being examined in a wide range of fora. Firstly, comprehensive rules have yet to be developed for foreign direct investment, which is contributing significantly to economic growth. At present, efforts have gone no further than consideration by the OECD and the conclusion of a string of bilateral investment treaties. In terms of competition policy, there is an increasing need to address large-scale M&As and the international harmonization of competition policy. To respond to rapid market development in the area of e-commerce, international rules urgently need to be developed on commerce, electronic signatures and the protection of privacy. 3. Toward 21stcentury rule-making Rule-making by the international community has recently seen the participation of a greater number of negotiating countries and a wider range of areas under consideration. To move forward with rule-making under these conditions, diversity has to be accepted. Possible methods could include (1) allowing greater flexibility in agreement participation and (2) rather than standardizing systems, adopting an approach which allows a certain degree of freedom. It will also be vital to give developing countries greater incentive to participate in new negotiations, as well as to work on capacity-building in these countries to develop the necessary mechanisms for ensuring their compliance with agreed rules. Further, with rules needing to be made more swiftly, areas are emerging in which the greater expertise and capacity of the private sector is giving it the lead role in rule-making—international accounting standards and international standards, for example. Government also has an increasingly important role in these areas. For example, to ensure that outstanding Japanese technology is adopted as the international standard, the government will need to make strategic efforts such as building cooperative ties with the Asia-Pacific countries.
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1. Progress of rule-making to date (1) Pre-WWII international rule-making: Facilitation of basic economic activities Cross-border economic activities took on new life as of the mid-19th century, spearheaded by Europe, and this, along with the astonishing progress of science and technology, spurred the multilateral creation of common rules. However, this was restricted to systemic harmonization in an extremely limited range of areas, and within certain regions. For example, the International Rivers Committee was established in the mid-19th century, recognizing freedom of passage on rivers passing through multiple national territories, such as the Rhine and the Danube. In the late 19th-century, the General Postal Union was set up, treating the West as one postal area, while its successor, the Union Postale Universelle, was systemized as an overarching international organization55. As for telecommunications systems, which stood alongside the postal system as a key means of cross-border information distribution, the International Telecommunications Union56 was established in the early 20th century to promote the efficiency of telecommunications business and develop related technologies. Standardization aimed at facilitating and promoting international trade was addressed in 1906 by the founding of the International Electrotechnical Commission, which handled electrical technology, as well as the International Federation of the National Standardizing Associations, set up in 1928 for areas other than electrical technology57. In the area of intellectual property rights, the 1873 Vienna Exposition sparked consideration, particularly by Europe, of international protection rules for industrial property rights, resulting in Europe-led rule-making such as the formulation of the Paris Convention58. This work was, however, restricted to basic principles such as national treatment and prior rights. The international rule-making which began in the mid-19th century was therefore originally focused on systems providing the foundation for smooth cross-border economic activities such as transport, posts, communications, and weights and measures. This rule-making was also conducted within the very narrow sphere of the developed countries, primarily Europe. (2) Trends from WWII up until the 1980s: Border rule-making centered around trade liberalization Since WWII, the international community has gravitated toward the establishment
55 The General Postal Union was launched in 1875, the UPU in 1878. Japan joined the UPU in 1877. The UPU became a UN specialized agency in 1948. 56 The ITU was born from the merger of the International Telegraph Union (launched in 1865) and the International Radio Telegraph Union (launched in 1906). It is currently a UN specialized agency. 57 Official ISA activities were suspended in 1942, with the UNSCC taking over ISA functions in 1944. As a result of a UNSCC conference in 1946, the ISO was established to promote international integration of industrial standards. See Sub-section 3: Toward 21st century rule-making for further details on the ISO. 58 Paris Convention (industrial property rights, 1883), Berne Convention (copyrights, 1886).
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of systems ensuring the universal freedom of movement of goods and money, as represented in the GATT and IMF systems59. As the surge in economic activities inevitably expands flows of not only goods and money, but also of people and information, a national order has gradually been formed to coordinate these flows. The International Monetary Fund (IMF) was established in 1945 to promote international currency cooperation and expand and balance international trade. This was followed by the 1948 launch of the General Agreement on Tariffs and Trade (GATT), while in 1952, the Customs Co-operation Council (CCC) was formed to promote international cooperation for tariff administration and the harmonization and simplification of national tariff systems60. Five rounds of tariff negotiations since the inauguration of the GATT brought down tariffs on a cumulative total of around 66,000 items61. Developed countries’ average tariff rates on manufactured goods dropped steadily from around 40 percent in the 1940s to approximately 25 percent in the 1950s and then to less than 20 percent in the 1960s62 . As tariff rates have fallen, the scope of liberalization has widened to encompass non-tariff barriers, with 10 agreements on non-tariff measures concluded in the Tokyo Round (1973-79), including the Agreement on Subsidies and Countervailing Measures and the Agreement on Government Procurement. Japan too followed suit with the GATT across-the-board tariff reductions from the 1960s through the 1970s, while also pushing forward swiftly with trade liberalization—shifting from import quota regulations to tariffs, lowering and then eliminating tariffs, and removing non-tariff barriers. As a result, the incidence of customs duty (as a percentage of the value of dutied imports) plummeted from around 20 percent to around five percent from the late 1960s through the 1970s (Fig. 4.2.1). The 1970s also saw swift liberalization of exchange controls, which had formerly placed heavy restrictions on international capital movement such as outward and inward investment63. In terms of the exchange of information too, patent and copyright treaties developed particularly by Europe in the 19th century evolved into the World Intellectual Property Organization in 1970, with 19th century rule-making shifted to a more sophisticated level. However, the systems built over this period were generally focused on the elimination and liberalization of border measures, namely tariffs and exchange controls on money and goods.
59 Liberalization of capital flows has been addressed since the late 1970s. See Wolf (2001). 60 Since 1994, this has been known as the World Customs Organization. 61 Total number of items for which tariffs have been reduced through successive negotiations. See Chikushi (1994). 62 This level dropped to around five percent in the 1990s. See Fox and Ordover (1995). 63 See Ministry of Finance (1987).
incidence of costoms duty (as apercentage of the value of dutied imports)incidence of costoms duty (as apercentage of the value of total imports)
Notes:1. “Average tariff burden as a percentage of total import value” = tariff income/total import value. 2. “Average tariff burden as a percentage of dutied import value” = tariff income/dutied import value.Source: Showa zaisei shi (Ministry of Finance).
IMF
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Tokyo Round concluded
Late 1960s～ 1970s～Elimination of import quotasTariff rate reductionElimination of non-tariff barriers
Liberalization ofexchange controls
Figure 4.2.1 Progress of trade liberalization and changing the incidence of costoms duty in Japan
(3) New developments since the 1980s: From border adjustment to domestic system adjustment Accelerated trade liberalization under the GATT/IMF system spurred the swift advance of globalization since the 1980s, leading to frequent disputes on points concerning domestic systems and other friction among national systems. For example, non-tariff barrier issues widened from such clear border issues such as import quotas to encompass domestic social issues such as standards systems, and business practices, ushering in an era in which even social systems became a source of international friction64. To resolve the friction created by the rapid globalization from the 1980s onward, traditional solutions based on border control and adjustment have had to be abandoned in favor of mutual domestic social adjustment and ensuring the viability of the international order, necessitating the construction of a new order. (a) Expansion of GATT/WTO disciplines Looking first at GATT, the focus of trade-related international rule-making, the Uruguay Round which was launched in 1986 carried further the elimination of border measures and trade liberalization negotiated in the Tokyo Round. New directions also emerged, with disciplines widening out to services and intellectual property rights, neither of which was covered under traditional GATT disciplines. As a result, the inauguration of the WTO in 1995 as a stronger and more advanced version of the GATT system also saw the organization’s agenda expand from disciplines for trade in
64 See Yamakage (1994).
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goods to a much wider range of economic areas65. Further, the proposed agenda for the new round which is expected to be launched this year includes not only the strengthening of existing disciplines such as anti-dumping, but also rule-making in new areas outside the WTO’s traditional scope, such as investment, competition, the environment. (b) Domestic systemic adjustment in relation to capital markets The globalization of financial transactions and the integration of capital markets which took place in the late 20th century also promoted the harmonization of national financial systems. Even credit uncertainty arising in relation to a foreign bank is now more likely to impact on domestic banks as a result of the convergence of international capital markets. To ensure bank soundness as a means of maintaining the stable supply of financial services, as well as to create the conditions for competition in cross-border international markets, in 1988, the Bank for International Settlements created the BIS standard66, a common standard for international bank equity capital ratios. This was highly significant as the first instance of international rules being established for finance, an area traditionally controlled by domestic regulations67. Japan announced the same year that the BIS standard would be applied to Japanese banks, and in 1998 introduced “prompt corrective action”68, special measures to bring financial institutions back to sound management based on these rules. The enormous impact of the introduction of these rules on Japanese bank management and credit is still fresh in memory, including, for example, banks unable to meet the 8% equity capital ratio closing down their operations abroad. (c) Domestic systemic adjustment in response to new issues The advance of liberalization-led globalization has boosted the need for rule-making in new areas outside the scope of border measures. As seen in Chapter III, Section 3, since the 1980s, growing international concern over environmental issues reaching beyond the national level to encompass the entire globe—destruction of the ozone layer, for example, and global warming—has lent momentum to the development of international rules calling for the adjustment of national systems to respond to such major-scale problems. Among the succession of multilateral environmental protection framework conventions concluded are: the Vienna Convention on Protection of the Ozone Layer; the Montreal Protocol, which provides even more specific stipulations regarding this area; the Basel Convention, which regulates the cross-border movement of hazardous waste in order to prevent 65 See Kotera (2000). 66 The BIS standard obligates member banks engaged in international banking to maintain equity capital ratios of at least 8% of loans and discounts outstanding. 67 See Iwata (1995b). 68 This “prompt corrective action” was introduced as a means of monitoring the soundness of bank management. The BIS standard was used in terms of the capital equity ratio based upon which measures would be instituted for banks with overseas branches, while domestic standards were amended for other banks to bring domestic standards closer to the concept of a single international standard.
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environmental pollution in developing countries; and the UN Framework Convention on Climate Change, aimed at stabilizing the concentration of greenhouse gases in the atmosphere, opening the way for sustainable economic growth (Fig. 3.3.3)69. Further, as new global-scale issues emerge, the international community is learning to create more effective rules which address the adjustment of national systems in various forms. For example, with the 1987 accident at the Chernobyl Nuclear Power Plant raising awareness of the importance of ensuring the safe and peaceful use of nuclear energy, 1996 saw the entry into force of the Convention on Nuclear Safety as an incentive agreement 70 encouraging countries to introduce appropriate domestic regulations. As this would suggest, international rule-making demands have expanded in recent years to include areas requiring adjustments to other societies and means of ensuring the enforceability of the international order, necessitating the construction of new systems and orders. Rules on border adjustment measures developed to date, such as import procedures and standards system, are being strengthened toward greater transparency and harmonization. At the same time, rules addressing rapidly changing and evolving international issues transcending national borders are now being created in various fora in various forms, such as framework conventions and incentive agreements (Fig. 4.2.2). Following the swift advance of globalization which began in the 1980s, the scope of international rule-making has therefore widened from a focus on border to domestic measures, and from trade to non-trade areas. Areas have also emerged requiring not just the adjustment of existing national rules, but also the creation of new rules—stimulation of investment activities, for example, and a response to the IT-led growth of e-commerce. The environment and the protection of workers are too further areas where new rules need to be developed. 2. Rule-making in new areas (1) Investment World foreign direct investment (FDI) has soared since the 1990s, particularly in comparison with the growth in trade over the same period of time71. This investment is recognized as providing great benefit to both developed and developing countries. At the same time, there is a growing call for the creation of comprehensive multilateral rules on direct investment.
69 While international rules for environmental protection in regard to limited areas such as the oceans and rivers existed even before the 1980s, it has only been since the 1980s that multilateral conventions have been formulated for the protection of the global environment. 70 Okuwaki, Kotera (1997). 71 Where the annual average growth rate for trade in goods was around six percent in the 1990s, direct investment grew at around 15 percent.
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Figure 4.2.2 Progress of representative international rule-making
Pre-WWII Post-WWII up to the 1980s 1980s onward
Characteristics ・Facilitation of basic economic activities ・Led by Europe
・Coordination of border measures ・Led by the GATT/IMF
・Coordination of domestic measures ・Diversification
Posts Union Postale Universellee (1878)
Communications International Telecommunications Union (1932)
Communications INTELSAT (1972)
Transport International Rivers Committee
Standards International Electrotechnical Commission(1906) International Federation of the National Standardizing Associations (1928)
Standards ISO (1946) Standards TBT Agreement (1995)
IPR Paris Convention (1883), Berne Convention (1886)
IPR WIPO (1970) IPR TRIPS Agreement (1995)
Goods GATT (1948) Customs Co-operation Council (1950)
Goods GATT/WTO (1995)
GATT negotiations Negotiation rounds * First round (1947) * Uruguay Round (1986-1994) * Second round (1949) * Third round (1950-51) * Fourth round (1956) Italy
Egypt
Rumania
France
UK
China
Switzerland
Germany
(BITs)
No. of B
ITs
No. of B
ITs between developed
and developing countries
72 See B
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Inve
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00
0 (B
usiness Council on Facilitation of Trade and
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The focus of most of the world’s BITs to date has been protection of investment assets and the post-investment business activities of investors—for example, guarantees concerning expropriation or nationalization of foreign investors’ assets and the free transfer of money such as profits and compensation. Limited attention has been paid to investment liberalization (banning of performance requirements73,
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BITs, however, would require expansion of the approximately 2,000 such treaties currently concluded to closer to 20,00077. As this suggests, creating multilateral investment rules would have enormous merit. Some developing countries are still strongly opposed to developing comprehensive multilateral investment rules. While recognizing FDI as vital to their economic development, they are concerned over the possible damage which could be caused by multinationals where investment policies were liberalized, as well as the restrictions on industrial policy arising from across-the-board application of national treatment and the banning of performance requirements. As noted in the analysis of East Asian development in Chapter I, however, investment will have a key role to play in the further development of the world economy. Creating comprehensive investment rules for investment protection and liberalization will be enormously significant for both developed and developing countries, which is why Japan and EU have been actively promoting inclusion of this item on the agenda of the next WTO round. While whether or not investment rules are considered in the new round will depend on the results of lead-up negotiations, there is no doubt that investment will be a key area of rule-making in the early 21st century. (2) Competition policy Competition policy was originally implemented as a means of securing benefit for domestic consumers through the promotion of fair and free competition, but with the internationalization of corporate activities and market integration, there is a growing need to supplement national competition policy with international rule-making in this area, including cooperation among countries. (a) Increasingly international corporate activities and competition policy As corporate activities become increasingly international, business practices in multiple countries or in other country are also impacting negatively on competition in domestic markets. For example, an anti-monopoly lawsuit has been underway in the US since 1998, asserting that Microsoft has been abusing its operating system monopoly in the area of application software. As Microsoft products are sold all over the world, Microsoft’s behavior inevitably impacts not only on the US but on other countries as well. Accordingly, the EU too launched formal investigation procedures against Microsoft as of August 200078. Another case was sparked by the 1997 merger of two US companies, Boeing and McDonnell Douglas, with the EU announcing that the merger infringed the EU’s Anti-Competition Law, and undertaking an investigation79.
77 UNCTAD (1998). 78 In Japan too, Microsoft’s Japanese subsidiary was ruled as having contravened the Anti-Monopoly Law in selling word-processing software as part of a spreadsheet software package, while a warning was also issued to the parent company concerning sales with binding browser software-related conditions attached. 79 The EU finally approved the merger plan in principle as not being in contravention of this legislation.
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Asia Africa Latin AmericaTaiwan (1991) Republic of Cote d'Ivoire（1991） Mexico (1992) Hungary (1990) Georgia (1992; currently being amended)India (1969; 1991) Tunisia（1991） Columbia (1959; 1992) Poland (1990) Moldovia (1992)Thailand (1999) Mali（1992） Venezuela (1992) Bulgaria (1991) Ukraine (1992)Indonesia (1999) Tanzania（1994） Jamaica (1993) Czech Republic (1991) Estonia (1993)
Zambia（1994） Brazil (1962; 1994) Latvia (1991) Kazakhstan (1994)Algeria（1995） Peru (1991; 1994) Rumania (1991) Slovakia (1994)Zimbabwe（1996） Russia (1991) Uzbekistan (1994)Republic of South Africa（1998） Belarus (1992)Malawi（1998）
Malaysia Cameroon EcuadorPhilippines Egypt El SalvadorChina Jordan Paraguay
GabonGhanaMoroccoSenegal
Notes:1. Figures within brackets indicate year of formulation or amendment. 2. This list is not inclusive.Sources: Fair Trade Commission web site, Hoekman (1997).
Figure 4.2.4 State of formulation of competition laws since the 1990s in developing countries and transition economies
However, the proactive extra-territorial application of domestic competition law can not only cause massive political friction, but is in fact very difficult to ensure effective enforcement. Appropriate prohibition of such anti-competitive business practices could be beyond the powers of any one country’s competition authorities, raising the necessity for rule-making, international cooperation included80. Although many countries have also yet to develop competition laws, developing countries and economies in transition have become active in adopting domestic competition law in recent years (Fig. 4.2.4). This is considered to be an evidence of the internationally growing recognition including by developing countries of the importance of competition policy. (b) Harmonization of competition policy 81 and tightening of disciplines There are two main types of rule-making on competition policy. One entails the harmonization of countries’ competition laws and policies, the other the tightening of the disciplines in a competition law. These are considered below in the light of specific examples. Firstly, merger control systems are an excellent example of harmonization of substantive rules. With international oligopolies and other problems arising in the course of market globalization, large-scale mergers and acquisition or strategic alliances now have a multi-faceted impact on the markets of countries concerned. The Boeing-McDonnell Douglas merger mentioned earlier was originally determined by the US as not infringing its antitrust laws, while the EU interpreted the same merger as being in contravention of EU legislation in this area. As is evident from this example, close cooperation among the related countries is crucial in regard to international corporate mergers through, for example, the exchange of information, while harmonization of rules has also become a pressing issue. If commonly applicable standards for merger control are not developed in the countries involved, 80 Cooperative relations between the EU and the US are becoming closer, with the Boeing-McDonnell Douglas merger resolved through working-level consultations between their enforcement institutions based on a bilateral agreement. Iyori (1999). 81 “Harmonization” in this sense has effectively come to mean “convergence” in recent years.
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International cartels Specific costs
Graphite electrodes cartel（1992～1997）$US5-7 billion impact on world-wide sales.50% price raise.
Lysine cartel(During cartel operation)Exorbitant charges of US$140 million imposed on world-wide sales.
Citric acid cartel(During cartel operation)Overcharges estimated at almost $US1.5 billion.Around 30% price raise.
Source: OECD (2000).
Figure 4.2.5 Representative global cartels and specific costs
corporate business in global markets will be placed in an extremely unstable situation. Another key issue in facilitating international business will be the harmonization of procedures. Current systems require notifications to be delivered to all the countries concerned, while notification requirements are different in each country. With international M&As becoming increasingly common (Fig. 1.2.9), failure to harmonize merger notification systems will result in a heavy corporate burden, and could obstruct the smooth development of companies’ international business activities. Next, the need for more strict disciplines can be observed in stronger crackdowns on cartels. For example, export cartels are a key area of international rule-making. However, while countries have designed their competition laws to protect domestic consumers, export cartels do not affect domestic markets, leading many countries to regard such cartels as exceptions to their competition law or outside its application. Tightening disciplines in this area is an important task in terms of international trade and competition promotion. Crackdowns on international cartels have also been strengthening. The OECD (2000) reported that an international graphite electrode cartel had raised graphite electrode prices by around 50 percent, while an international cartel on citric acid had pushed up prices by around 30 percent in the course of the cartel (Fig. 4.2.5). To reap further economic benefit from lower prices and cost-saving, in addition to countries moving ahead with liberalization through services negotiations under GATS, disciplines also need to be tightened to crack down on anti-competitive business practices. (c) Need for multilateral harmonization In terms of harmonization of competition laws, substantive harmonization has been under consideration by multilateral bodies such as the International Trade Organization and the United Nations since the 1950s, but with countries unable to reach a consensus, most negotiations have ended in failure82. Bilateral efforts, on the other hand, typically cooperation agreement on competition law such as information exchange, have been active since the 1970s, including the 1976 US-Germany
82 Only the EU succeeded in harmonizing competition law as part of its drive to create a common market.
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agreement, followed by agreements between the US and Australia, the US and Canada, Germany and France, and the US and the EU, and these have achieved some results. Japan concluded a similar agreement with the US in 1999. However, as only a few such bilateral agreements have yet been reached83, this trend will have to be expanded. Agreements are also limited in substantial, such as to requesting the other country to launch an investigation on execution of the law in question, and will need to be further deepened in the years ahead. In addition to development of these bilateral agreements, moves are also being made towards harmonization in multilateral fora. International negotiations on harmonization of competition laws under the GATT have been called for since the Uruguay Round, with this area emerging as an important future issue. The 1996 WTO Ministerial Conference in Singapore resulted in the establishment of the Working Group on Interaction between Trade and Competition Policy, which is debating the possibilities for the international harmonization of competition laws and policies84. However, conflicting views have emerged between developed countries and some developing countries in regard to multilateral rule-making on competition laws and policies. Developed countries want their developing counterparts to adopt and reinforce competition policies as part of the liberalization of exports to and direct investment in developing countries, in much the same vein as the investment liberalization discussed above. Developing countries understand that receiving direct investment is essential for smooth economic development, and recognize the importance of competition laws and policies in that sense. At the same time, some developing countries regard a certain degree of competition restriction as necessary in their development, and are concerned about the possible impact of international rule-making on employment and the competitiveness of domestic companies. Their stance, therefore, is that such rule-making would be premature. Moving ahead with international rule-making on competition law in a form that includes developing countries will be no easy task 85 . Nevertheless, developing international rules on competition policy will be crucial in facilitating corporate business activities in a global economy, as well as in eliminating the damage caused by international cartels. (3) E-Commerce While the Internet was developed in the US in the 1960s for military purposes, it 83 Even the US, which has participated in the greatest number of bilateral anti-monopoly cooperation agreements, has only concluded eight (with Germany, Australia, Canada, the EU, Israel, Japan, Brazil and Mexico). 84 However, current WTO considerations are not on the creation of high-level rules, but rather center around basic issues such as boosting the transparency of domestic competition laws and policies, cracking down on hard-core cartels, and establishing a mechanism for information exchange among national authorities. 85 Hoekman (1997) presents a number of scenarios concerning WTO handling of competition policy, and considers these from a developing country perspective.
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Source:Market Research on Japan's Electronic Commerce 2000 (Accenture,ECOM,and METI).
Figure 4.2.6 Expected trends in e-commerce market scale
Figure 4.2.7 International trade of selected e-commerce firms (1997)
came into commercial use as of the end of the 1980s, and e-commerce providing direct BtoB and BtoC cross-border links through the Net is now expanding at breakneck speed. While Japan has yet to catch up with the US, a pioneer in this field, its BtoB market was estimated at around 22 trillion yen in 2000, 824 billion for BtoC, with enormous growth expected in the near future (Fig. 4.2.6). Accompanying the evolution of the Internet, international rule-making for e-commerce has become the subject of international discussion. (a) Expansion of cross-border e-commerce The rapid advance of IT and e-commerce is in the process of creating a cross-border cyber-space. Using the Internet, one click allows consumers to shop abroad from the comfort of their own homes, turning cross-border trade into an everyday reality. Major Net companies which have stolen a march in this area are already seeing 20 to 30 percent of their gross trade value originating abroad (Fig. 4.2.7). The expansion of cross-border trade through e-commerce offers new possibilities previously unavailable to companies and consumers, but has also created various unforeseen problems in terms of legal systems and business practices, including rules on commerce, digital signatures, protection of privacy, protection of intellectual property rights, tariff treatment, consumer protection and regulations on harmful content. Rules on these issues are currently being explored in various fora. An overview is provided below on duties on electronic transmissions, individual privacy protection and consumer protection as three of the most representative issues.
(BtoB) (BtoC)
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(b) Rule-making on e-commerce (Contract law) Commerce using electronic media presents aspects not foreseen by traditional contract law. To address this, the United Commissions on International Trade Law (UNICTRAL) adopted the Model Law on Electronic Commerce in 1996 to cover issues arising from the use of electronic media in the contract process, stipulating (1) that electronic information shall have the same validity as written information and (2) that electronic signatures shall be recognized as having the same validity as ordinary signatures and seals. This law is intended to provide a model for governments in their e-commerce rule-making. (Tariffs on electronic transmissions) At the May 1998 WTO Ministerial, a moratorium was agreed on electronic transmissions, namely that because of the technical difficulty involved, as well as the wish to promote the development of e-commerce, duties would not be levied on such transmissions until the Ministerial scheduled for the end of 1999. Because of breakdown in negotiations at the 1999 Ministerial in Seattle, no new agreement has been reached about the handling of tariffs, with the moratorium continuing. The Okinawa Charter on a Global Information Society, agreed at the 2000 Okinawa/Kyushu Summit, also refers to ”… Continuing the practice of not imposing customs duties on electronic transmissions, pending the review at the next WTO Ministerial Conference”. (Protection of individual privacy) Because online purchases by consumers allow businesses to accumulate personal information, concern has been growing as to protection of this information. In terms of international rule-making, controversy was aroused by the EU directive on the protection of personal data86 issued in October 1998. This directive banned the transfer of individual information within the EU by extra-territorial countries not providing an adequate level of individual information protection, creating concern that non-EU businesses would be shut out of the EU market. Where the EU is proposing the protection of individual privacy through the introduction of legal systems, the US has chosen to respect voluntary regulation by the private sector, and has also dealt with the legal system issue through segmentation into separate laws. The US government accordingly lobbied the EU until it succeeded in reaching agreement in April 1999 on the introduction of protection standards in regard to the handling of personal information, concluding a safe harbor agreement to provide specific guidelines in this regard87.
86 Formally known as the Directive 95/46/EC of the European Parliament an of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data. 87 The safe harbor agreement comprises protection guidelines on (1) notification; (2) consumer choice; (3) information transfer; (4) access; (5) security; (6) data consistency; and (7) enforcement. Companies abiding by these conditions are regarded as engaging in the “proper”
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In Japan, the Administrative Organ Personal Data Protection Law (formally known as the Act for Protection of Computer Processed Personal Data held by Administrative Organs) was formulated in 1998. However, as this is a law on personal data held by government administrative institutions, with only individual laws applying to the private sector, the government is currently pursing preparations for passing a basic law on the protection of individual information under the auspices of the Advanced Information and Telecommunications Society Promotion Headquarters88. (Consumer protection) Protection of privacy has been examined by the OECD, which produced the Guidelines for Consumer Protection in December 1999 as general guidelines for the various aspects of consumer protection, including: (1) transparent and effective protection; (2) fair business, advertising and marketing practices; (3) online disclosures; (4) confirmation process; (5) payment; (6) dispute resolution and redresss; (7) privacy; and (8) education and awareness. However, the guidelines are not legally binding, and a divergence of views still remains between the US and the EU, with the former stressing voluntary private-sector rules while the latter considers the adoption of certain regulations. Developments in this area will depend heavily on the evolution of discussion. (c) Wide-ranging considerations Vigorous national discussion on rule-making for e-commerce is in fact underway at all levels at present, from international institutions such as the WTO and OECD through bilateral consultations and private groups such as the Global Business Dialogue on Electronic Commerce89 (GBDe), at which companies from around the world discuss means of further promoting e-commerce. Recognizing the importance of contributing actively to rule-making in such international consultations, in October 2000, Japan announced a proposal on e-commerce90 which identified key points for consideration given the e-commerce environment, while also noting the need to ensure benefit for both businesses and consumers, address liberalization and rule-making, and find a balance between developed and developing countries. The proposal has been valuable in spurring discussion on e-commerce rule-making. 3. Toward 21stcentury rule-making Since the 1980s and the swift advance of globalization, the scope of international
protection of individual information stipulated in the EU directive. See the US Department of Trade web site for further details. 88 As a result of deliberations by the Expert Committee under the Headquarters, the Outline of Fundamental Legislation for Personal Information Protection was formulated in October 2000. 89 See Column 10 for details on the GBDe. 90 Towards eQuality: Global Commerce Presents a Digital Opportunity to Close the Divide Between Developed and Developing Countries, MITI’s Proposal for WTO E-Commerce Initiative.
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Column 10: GBDe efforts The world’s business leaders gather at the Global Business Dialogue on Electronic Commerce (GBDe) to draft and implement voluntary measures to promote the development of e-commerce, aiming at private-sector led international rule-making. While the business world has a number of e-commerce-related fora, the GBDe is distinguished by discussion among CEOs from all areas of industry, including venders, service providers, content producers and financiers. A total of 63 companies (as of March 2001) participate in its steering committee. Since the GBDe was officially launched by the steering committee in January 1999, general meetings have been held on an annual basis, starting in Paris in 1999 and then in Miami in 2000, with the third to be held in Tokyo this September. Around 400 people took part in the second general meeting last September, discussing issues and making recommendations on (1) privacy; (2) alternative dispute resolution (ADR); (3) trustmarks; (4) intellectual property rights(IPR); (5) trade and taxation; (6) advocacy ; (7) digital bridge; and (8) cyber security. This year’s agenda will comprise the nine issues listed in figure 4.2.8, with the focus on the realization of recommendations. More specifically, best practices in relation to consumer confidence and digital bridge will be established on the basis of dialogue with industry and consumer groups, and an information-sharing mechanism will be built as part of international private-sector coordination. A system will also be constructed to review the impact of recommendations on different countries.
Working Groups Asia/Oceania Americas Europe/Africa１ Consumer confidence NEC Hewlett-Packard Daimler Chrysler２ Convergence Nomura Research,and Toshiba AOL Telefonica３ Cyber security NTT Date EDS Deutsche TeleKom４ Digital bridge Equitable Card Accenture Alctel５ E-government Hitachi Cisneros Standardata６ Internet Payment Bank of Tokyo Mitsubishi TD Bank Financial Group ABM AMRO Bank７ IPR NTT The Walt Disney Company Bertelsmann AG８ Taxation Fujitsu BCE Siemens９ Trade/WTO Sharp IBM Mediaset
Source: GBDe materials.
Figure 4.2.8 2001 Working Groups(GBDe)
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rule-making has been widening from border measures to domestic measures, and from trade to non-trade areas. At the same time, the number of players in the international community has also increased, creating a complex web of national interests progressively less amenable to harmonization. Nevertheless, the globalizing international community will need to find a way to resolve this situation and move forward with 21st-century rule-making. (1) Tolerance of diversity As globalization has progressed, more diverse players (developing countries included), a less homogeneous international community, and a wider scope have boosted the complexity of rule-making. For example, the WTO currently has 140 member, around 80 percent of which are developing countries. There are also 29 least-developed countries (LDCs) among the latter, matching the number of developed countries, while Vietnam, Cambodia and four other LDCs are currently applying for accession91 (Fig. 4.2.9). With participants and the negotiating agenda becoming more varied, rule-making will need to be pursued with greater tolerance for this diversity.
Figure 4.2.9 Trends in the number of GATT/WTO member countriesand the ratio of developing countries
Developing countriesDeveloped countriesRatio of developing countries (right scale)
(No. ofcountries)
Note: “Developed countries” here refers to the 30 OECD members and the EC, with current OECD member countriescalculated as at the point of joining the WTO.Source: WTO Secretariat materials.
Japan joins GATT
WTO launched
Uruguay Round
KennedyRound
Tokyo Round
(Year)
(a) More diverse participants, more diverse negotiating modes Because each nation presents different circumstances in terms of, for example, income levels and culture, and consequently brings to the negotiating table different incentives, reaching a consensus among such diverse parties is a Herculean task—for example, recall the debate on environmental and labor issues observed in the previous chapter. Positions on trade and the environment reflect social and economic diversity in running the gauntlet from an emphasis on the environment through to the protection of free trade, leading to stormy debate. One issue of growing importance is
91 As at February 2001.
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consideration of ways to provide incentive for participation in rule-making by all parties, developing countries included. There are, for example, a plurilateral approach concerning to the new WTO round, the new negotiating modalities for the WTO negotiations on trade in services introduced in Japan’s proposal, or regional and bilateral approach. Looking first at the plurilateral approach, the EU has made an informal proposal for the new round which leaves countries with the choice of whether to sign final agreements reached on investment and competition rules, the aim being to increase incentive for developing country participation92. This framework offers two major advantages—(1)rule-making levels would not need to be lowered, and (2)developing countries could decide whether or not to participate based on their respective capacities. On the down side, where a large number of developing countries decided not to participate, rule-making would lose much of its significance, while the international community could split into two tiers. At the same time, guaranteeing freedom of choice in terms of participation through to the last stage of negotiations would seem one potentially valuable approach in ensuring sufficient incentive for developing country participation in rule-making for new areas. Next, proposal on new negotiating modalities for the negotiations on trade in services are being considered as a means of supplementing traditional request-offer approach. Japan is studying the possibility of reaching agreement among members on a sectoral coverage of commitments based on the scale of the economy as well as the economic growth of each member, with a view to achieving a progressively higher level of liberalization in the services trade (see Column 11). This would certainly be a valid option in terms of advancing services negotiations while recognizing diversity among members with different economic scales and levels of economic development. The idea behind the use of regional and bilateral agreements is to have rules created in negotiating fora with a limited number of participants, rather than in multilateral fora with their numerous and diverse memberships. This approach is examined in more detail in Section 3. In summary, various negotiating modes are being proposed to advance rule-making in a way which allows for the growing heterogeneity of the international community, while this rule-making is taking place in a range of arenas. Addressing individual areas through the compound and complementary use of multilateral, regional and bilateral negotiations will open the way for swifter rule-making with a wider scope.
92 While the EU is proposing a plurilateral approach to investment and competition rules, Japan’s position is that new rules should be set low level but with all WTO members participating—a multilateral approach (“level of ambition” adjustment). However, in the case of competition rules, Japan is prepared to accept a plurilateral approach as more realistic in terms of acceptance by developing countries.
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Column 11: Proposal on new negotiating modalities for the negotiations on trade in services The negotiations on trade in services were launched in 2000 in accordance with Article XIX of the GATS, which stipulates that members shall enter into successive round of negotiations, beginning not later than five years from the date of entry into force of the WTO Agreement, with a view to achieving a progressively higher level of liberalization. Given the various different domestic economic environments and economic levels, the process of liberalization will have to be pursued with consideration of these factors. The Japanese proposal on the negotiations on trade in services, submitted to the WTO Secretariat in December 2000, noted that Japan was considering the possibility of reaching agreement among members on a sectoral coverage of commitments based on the level of economic development as well as the economic growth of each member. Figure 4.2.10 plots the level of development and the number of committed sub-sectors of members, revealing a correlation between the two. Japan is considering whether it is possible for members to expand their number of commitments based on this relationship. Specifically, for example, economic growth of members could suggest the possibility that their number of commitments could be increased. Further, the regression line in Figure 4.2.10 indicates the average number of commitments of members considering the level of economic development. This means that the members spotted below the line are relatively less liberalized than the average. Japan is therefore also examining whether such members might need to make greater efforts to liberalize their markets. Negotiations to date have been conducted on a bilateral request-offer basis whereby one party to the negotiation presented the other with a wish-list and a concession list and vice-versa, with the two parties then working to find a balance between their concessions. The Japanese proposal on a new negotiating modality could supplement this request-offer approach.
Figure 4.2.10 Number of commitmentted sub-sectors in negotiationson trade in services and per capita GNP
Notes:1. See Appended Figure 4.2.1. 2. “Number of committed sub-sectors” include each of the 137 sub-sectors (excluding ”Other”) in which a member has made at least one commitment of some nature, based on members’ current chedules. 3. New WTO members and the members with five or fewer commitments were excluded. 4. Per capita GNP values are purchasing power parity values for 1998.Sources: METI calculations based on World Development Report (World Bank) and WTO Secretariat materials.
Average no. ofcommitted sub-sectors
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Figure 4.2.11 Harmonization menus and modes
Menu/mode Specific examples
Convergence System uniformity
* Anti-Competition Law (EU) * Postal systems * Telecommunications systems * Weights and measures
Mutual recognition Mutual recognition of other countries’ systems
* MRAs * TBT agreement
Regulatory forbearance
Restriction of government intervention to the bare minimum (stipulation of measures governments should not adopt)
* GATS market access provisions
Minimumal requirements
Establishment of minimum levels (no duplication or contradiction among countries’ domestic systems)
* TRIPS * BIS standard * Bilateral agreements concerning cooperation on anti-competitive activities
Non-homogeneous regulatory targets
Methods left to discretion of individual countries, which are only obligated to produce results.
* Basel Convention * Framework Convention on Climate Change
Harm
onzation
Cooperation
Peer-pressure Autonomous adjustment based on information disclosure (no specific obligations placed on countries)
(b) Broader scope and more diverse approaches As exemplified by the GATT/WTO system since the 1980s, international rule-making has shifted from border control and adjustment to the adjustment of domestic social systems. With a broadening range of areas calling for the construction of a new international order, harmonization methods are also becoming more diverse. Systemic harmonization does not necessarily mean system uniformity (the “Convergence” approach). Musical harmony, after all, entails a variety of tones and melodies produced by different instruments. Similarly, systemic harmonization assumes a basic systemic diversity, coordinating the various domestic systems to ensure that dissonance does not arise but also taking advantage of the merits of diversity (the “cooperation” approach)93. The different approaches are laid out in Fig. 4.2.11, and are also described in detail below. (The “convergence approach” and the “cooperation approach”) The convergence approach unifies and converges systems which have been internationally standardized. Adoption of common standards and systems provides greater convenience than where countries employ different systems and standards. For example, cross-border businesses can compete with companies in other countries under the same rules. On the down side, introducing new standards and systems is extremely expensive. The cooperation approach addresses systems with the assumption of national systemic differences. Changes are more limited than in the case of the convergence approach, reducing coordination costs. This approach is examined below on the basis of its five key components: mutual recognition, regulatory forbearance, minimal
93 See Sykes (2000), Iwata (1995a) and Nakagawa (1998) on harmonization. Iwata describes this “convergence approach” as the “harmonization approach”.
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requirements, non-homogeneous regulatory targets, and peer-pressure. (Five components of the coordination approach) Starting with “mutual recognition”, this entails the validity evaluation authorities of one country accepting evaluation results arising from the validity assessment criteria and procedures of the other country as the equivalent of their own evaluation. This practice originated during the EU market integration process, where it was used to integrate intra-regional standards and validation systems, but has subsequently been employed by the EU in its dealings with extra-territorial nations. The EU concluded a mutual recognition agreement (MRA) with Australia and New Zealand in 1996, and with the US and Canada in 1997, and continues to work proactively in this area, including the provisional signature of a draft agreement with Japan in 200094. The WTO Agreement on Technical Barriers to Trade (TBT) also encourages the mutual recognition of validity evaluation procedures. Such mutual recognition systems are reducing costs and improving market access for globally active companies. “Regulatory forbearance” entails individual countries coordinating their rules toward the development of a competitive environment through the restriction of government intervention to an agreed level. For example, the market access clause of the GATS (Article XVI) lists only six types of typical measures which governments should not maintain or adopt in areas in which countries have made commitments without exceptions, including restrictions on the number of service providers, employees and extent of foreign capitalization. “Minimal requirements” means establishing minimal levels in terms of developing a competitive environment and fulfilling safety and other policy goals while avoiding duplications and contradictions with other countries’ domestic systems. Examples include the BIS standard, the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement), and bilateral agreements concerning anti-competitive activities (an area where the EU has been particularly active). “Non-homogeneous regulatory targets” — or, in other words, imposing only the obligation to produce results while leaving the means to the discretion of individual countries—is incorporated in numerous recent multilateral agreements on global environment protection, among them the Basel Convention, the UN Framework Convention on Climate Change, and the Convention on Biological Diversity 95 . Responding to global environment protection issues requires not only the development of measures to prevent and relieve environmental damage and dangers, but also the strengthening of regulatory regimes—for example, the establishment of
94 Japan and the EU provisionally signed a draft proposal in December 2000 on four areas—electrical products, telecommunications peripheral devices, chemical products, and pharmaceuticals—with both countries currently engaged in final domestic procedures towards putting the agreement into force during 2001. 95 See Yamamoto (1995) on framework convention.
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standards, monitoring, information exchange, and prevention measures. However, the introduction of a set of rules necessitates rigorous requirements and procedures in relation to the drafting, adoption, entry into force and amendment of these rules, which is also time-consuming. Such rules also only apply to the related countries, and are thus inadequate in dealing with rapidly evolving international issues. This particular approach simply stipulates general principles concerning obligations in the area in question. To ensure that obligations are met while also maintaining flexibility, separate protocols and annexes are drawn up on specific content and the respective burdens on member countries, and regular reviews undertaken. When “non-homogeneous regulatory targets” are eased a notch further, they become “peer- pressure”. Parties to an agreement take on the obligation to explore various types of measures, but the specific content is left to the discretion of each country, with regular reports on these measures considered at meetings with other parties to the agreement. In other words, peer- pressure is a mechanism encouraging self-directed improvement through the disclosure of information. While the obligations placed on nations are the most relaxed among the various approaches, this is an effective means of coordination in areas where countries share common goals. Specific examples include the NAFTA supplementary agreements on labor and the environment, the first international treaties to be concluded as a result of agreement among developed and developing countries which establish mechanisms linking trade-related profit with environmental protection and labor standards. Rather than establishing common labor and environment standards for the three member countries, members are required to ensure high environmental protection and labor standards in line with domestic law, and to continue to work to improve these. For example, in the North American Agreement on Environmental Cooperation, member countries are obliged to disclose information on their environment laws, while a Commission for Environmental Cooperation was also established comprising ministers and non-government representatives from the three countries. Where complaints are received that member countries are not effectively enforcing their environment laws, a fact-finding investigation is undertaken, with the committee able to indicate any oversights to the country in question. Countries receiving such instructions are not legally obliged to make improvements, but are effectively pressured to do so as a result of information disclosure96. Selecting from these various approaches should allow the resolution of many inter-linked cross-border issues97. The optimal approach should be chosen for the particular area in question, bearing in mind the respective merits and demerits of each approach. (2) Capacity-building in developing countries While building international systems, it is important to provide developing
96 See Nakagawa (1997) for details on procedures and other elements of the North American Agreement on Environmental Cooperation. 97 See Sykes (2000).
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countries with necessary institutional capacities for ensuring compliance with the agreed rules as well as the incentive to participate in the forthcoming negotiations. In this regard, capacity-building has two major roles: firstly, it improves countries’ capacity to implement existing rules; and secondly, it builds the necessary capacity for making rules in new areas. (a) Improving the capacity to implement existing rules Since 1980s, rule-making activities have increased, with developing countries embraced, and wide disparities have emerged in national rule implementation capacity. Also, in a growing number of areas - environmental protection, for example - rule-making needs to be backed by mechanisms to ensure that rules are in fact followed. Capacity-building in developing countries is a vital means to these ends. Part of the new importance of improving the capacity to implement existing rules lies in the dramatic expansion in WTO Agreement compliance obligations placed on developing countries as a result of the Uruguay Round. For example, while personnel with specialist skills are essential in implementing the GATS, TRIPS and TRIMs, personnel shortages are rife in developing countries. Looking also at utilization of WTO dispute settlement procedures, developing countries are far more likely to be subject to requests for consultations than to request such consultations themselves, with more than 60 percent of requests made by the US, the EU and other developed countries (Fig. 4.2.12). Participating in dispute settlement procedures has in itself become a major burden for developing countries. Moreover, while the transitional period for eliminating trade- and investment-related measures allowed for developing countries terminated at the end of 1999, many countries have requested its extensions. They struggle to implement existing agreements.
Figure 4.2.12 Use of WTO dispute settlement mechanism by country
0
10
20
30
40
50
60
70
80
90
US EU Japan Developing countries
(No. of cases)
�������� No. of requests made for consultation
No. of requests for consultation receivedOf those, against (US, EU, Canada, Japan)
Note: 1. Number of cases from the time the WTO was launched up until January 2001. 2. Developing countries here refers to those countries receiving ODA according to DAC statistics.Source: Report on the WTO Consistency of Trade Policies of Major Trading Partners (METI).
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Numerous developing countries insist on a reduction in the level of some commitments stipulated under agreements deriving from the Uruguay Round in areas where they have difficulty in implementation of the agreements. Given, however, if developing countries’ insistences are satisfied, the large number of Uruguay Round commitments would need to be amended as a result. It would seem important rather to assist developing countries in building their capacity to implement the WTO Agreement as a means of ensuring that rules are brought into effect. Japan responded to this need by proposing at the June 2000 APEC Meeting of Ministers Responsible for Trade the strategic implementation of capacity-building supports in line with needs of developing countries. These needs were subsequently ascertained through questionnaire and field surveys in nine APEC economies98, based on which draft supports programs were created. Drawing from survey results, it is suggested of the support programs in the following six areas: (1) development of the knowledge and know-how necessary for the implementation of WTO Agreement; (2) development of relevant domestic laws; (3) creation of relevant infrastructure, such as computers and other equipments; (4) acquisition of negotiation technique; (5) acquisition of skill on dispute settlement in the WTO; and (6) support for the accession to WTO of China, Taiwan and Vietnam. The survey indicated a particularly strong need for human resource development projects99. APEC’s next step will be to institute survey-based support through cooperation on the part of developed APEC economies and related international institutions. (b) Boosting developing country understanding and capacity in new areas Many developing countries, noting the far heavier burden imposed as a result of the Uruguay Round, and also unconvinced that agreement implementation truly contributes to their economic development, are concerned that rule-making in new areas will increase their burden still further. One possible participation mode for such countries could be the EU plurilateral approach explained earlier. However, given that the benefit which the international community derives from the participation of the greatest possible number of countries in rule-making, developing countries must be brought to a greater understanding of the need for new rules. Smooth progress in this regard will also hinge on providing assistance for the development of domestic systems. For example, as many developing countries have yet to institute competition laws (Fig. 4.2.4), it will obviously be important to support the development and smooth operation of domestic laws in these countries to lay the ground for rule-making in new areas. Japan has put forward proposals adapted to developing country concerns on investment and competition, key themes in terms of new rule-making in the new WTO round, and is also conducting seminars to promote developing country understanding in these areas. Through the APEC framework, Japan held an
98 Peru, China, Vietnam, the Philippines, Malaysia, Thailand, Papua New Guinea, and Indonesia. 99 This HRD was in relation to (1), (2), (4) and (5).
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investment and competition seminar in Peru in August 2000, followed by the same one in the Philippines in November. A seminar on the two themes was also held in Australia in September 2000 within the Asia-Europe Meeting (ASEM) framework. At the bilateral level, Japan organized a competition law workshop in Indonesia in November 2000. In January 2001, the Malaysian government hosted an education session to develop mutual understanding toward the launch of a new WTO round. Japan, China, Korea and the ASEAN countries (ASEAN + 3) took part, discussing anti-dumping, environment, electronic commerce, investment and competition, with Japan explaining the importance of these themes and outlining its own proposal, while also working to deepen understanding of the benefits which these areas offer to developing countries. Capacity-building is of course equally important in areas outside the WTO Agreement. To ensure the widest possible participation in rule-making in new areas, as well as the effectiveness of these rules, it will be increasingly important to promote understanding and develop capacity in developing countries as partners in the international community. (3) Swifter rule-making and the need for private-sector initiative With borders losing their meaning and companies choosing among countries as a result of the swift advance of globalization, countries are now competing to design systems which will provide the kind of attractive business environments companies will be drawn to. Rule-making in areas directly related to corporate activities—for example, foreign investment regulations, corporate law, competition law, and standards—is becoming a key issue in the execution of external economic policy. Private companies too are calling on government to use economic negotiations to develop rules in support of global corporate activities (Fig. 4.2.13).
0 10 20 30 40 50 60 70 80
Convergence of national systems and rules to promote a global business environment
Coordination over macroeconomy operation(including exchange rate stabilization)
Figure 4.2.13 Role which the private sector expects government to play in economic negotiations(Companies/groups)
Note: 1.Total of 89 respondents (27% response rate from the 330 companies/groups to which the survey was sent).
Source: Questionnaire survey on the role of the private sector in Japan-US trade and economic negotiations and international economic negotiations (International Bureau, Japan Federation of Economic Organization,1999).
Development and strengthening of internationaldispute settlement organizations and procedures
Initiatives to promote trade and investmentliberalization at world and regional level
2.Multiple answer.
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At the same time, companies and private-sector groups are also presenting the government with proposals on more ideal systems and engaging actively in rule-making on a private-sector basis. If Japan is to ensure the swift design of systems which will develop the Japanese economy into an attractive market, as well as contributing actively to international rule-making, “dialogue with the market” will be vital, respecting the specialist know-how and abilities of the private sector. (a) International harmonization of accounting standards led by private-sector The expansion of cross-border fund procurement and investment activities and the demand for investor protection which has accompanied direct investment have made the international harmonization of accounting standards an urgent issue, particularly to companies and investors, the main players in capital markets. Non-homogeneous accounting standards force companies to shoulder the cost of creating different financial statements to each country’s specific standards. Investors too have to compare and judge the various national accounting standards every time they consider providing companies with risk money. In response to this situation, the International Accounting Standards Committee, a private-sector organization launched in 1973, has been spearheading the formation of international accounting standards. Support for the IASC has grown rapidly since the 1980s and the internationalization of capital markets, with the comparability project, which began in 1987, representing a particularly major turn-around for the group. This project aims to limit the diversity of account-processing methods recognized to date and converge the accounting standards used for the creation of financial statements. Powerful momentum has also been lent to IASC activities by the 1987 addition of the International Organization of Securities Commissions (IOSCO), a gathering of national monitoring authorities, to the IASC Consultative Group. Further, IOSCO announced in 1995 that when IASC completed its core standards, it would support the use of international accounting standards for cross-border capital raising and listing purposes in all global markets. This support was approved in May 2000. In 2000, the European Commission and the Basel Committee on Bank Supervision both expressed support for international accounting standards, which are expected to gather increasing influence. To ensure its ability to respond quickly to market needs in creating high-quality, integrated accounting standards, the IASC is also currently engaged in organizational reform, including shifting 12 of the 14 Board members on to a full-time basis and strengthening linkages with domestic accounting standard setting body100. Countries are beginning to work on improving their function of standards-setting to meet this internationalization of accounting standards. The accounting standard
100 The new IASC Constitution created as part of its reforms include the objective of “convergence of accounting standards and International Accounting Standards”.
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setting body in the Anglo-Saxon countries which have led the inception of accounting standards to date—the US, the UK, Canada, Australia, etc.—are all independent bodies with full-time specialist staff, enabling them to respond flexibly to market changes. In Canada and Australia, organizational reforms have recently put the leaders of these organizations on to a full-time basis, further strengthening domestic set-ups 101 . In Germany and France, standards have been under the control of government-affiliated non-permanent institutions, but a new permanent private-sector institution has now been established in Germany in response to the rapidly-changing situation in relation to international accounting standards102 (Fig. 4.2.14). Japan has seen a surge in the ratio of foreign investors involved in its stock distribution market in recent years (Fig. 4.2.15). In response to this situation, the
101 Yamada,2000. 102 The German case is described in Furuichi(1999).
US UK France GermanyMode Private Institution Private Institution Government Institution Private InstitutionTitle Financial Accounting Standards
Foreign share in stock dealing payments (right scale)
Figure 4.2.15 Ratio of foreign investors in Japan’s stock distribution market
(year)
(100 million yen)
2000
(%)
Source: Ministry of Finance and Tokyo Stock Exchange materials.
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Year State of formation of international accounting standards Recent trends in accounting system reform in Japan1973 [Jun]Establishment of the IASC.
[Jan] The IASC starts the Comparability Project.
[Jun] The IOSCO participates in Consultative Group.
1989 [Jan] The IASC announces Comparablity of Financial Statements.
1995 [Jul] The IOSCO announces that it will accept the IASC's completedcore standards.
1996 [Nov] Financial Big Bang starts.
1997 [Jun] The Business Accounting Council(BAC) releases a opinionfinancial statements reporting system.
[Mar] The BAC releases opinions on setting accounting standardsfor interim reporting,cash flow statements,and R&D costs.
[Jun] The BAC releases a opinion on the accounting standards forpost-employment benefits.
[Dec] The IASC Strategy Working Party approved a Discussion"Shaping IASC for the Future".
[Jun] The Ministry of Finance and the Ministry of Justice release areport on cordinating the commercial code and accounting standards.
[Dec] The IASC completes core standards. [Oct] The BAC releases a opinion on tax effect accounting.
[Jan] The BAC releases opinion on accounting standards forfinancial instruments.
[Oct] The BAC releases opinion on accounting standards for foreigncurrency transactions.
［Dec］ The IASC Strategy Working Party published its report"Recommendations on Shaping IASC for the Future" .
[Dec] Liberal Democratic Party(LDP) reveals a opinion on a newaccounting standards setting body.
[Mar] The Japanese Institute of Certified PublicAccountants(JICPA) releases recommendation paper for a newaccounting setting body.
［May］ The IASC Member Bodies approves a restructuring planand a new Constitution.
[May] The International Federation of Accountants(IFAC) electsTsuguoki Fujinuma as President.
［May］ The IOSCO approves for its members to use internationalaccounting standards in cross-border offering and listing.
[Jun] A discuttion group(established by the Ministry of Finance)releases the paper on a new accounting standards setting body.
[Jul] Financial Services Agency launches(the BAC also transferredout of the Ministry of Finance).
2001 ［Jan］ The IASC makes the transition to the new organization. [Jan] Tatsuta Yamada is elected as a member of the IASC Bord.
Source:Various materials.
Figure 4.2.16 State of formulation of international accounting standards and recent trends in accounting system reform in Japan
2000
1999
1998
1987
government began to create more transparent, internationally credible accounting standards as part of the establishment of basic economic infrastructure through the November 1996 “financial Big Bang” advocated by then-Prime Minister Ryutaro Hashimoto (Fig. 4.2.16). As a result, Japan’s accounting standards are now on a par with the US and Europe, while discussion has turned to fixed-asset and corporate consolidated accounting. As noted earlier in Section 1, foreign investment in Japan and structural reform progress will hinge on the development of transparent and internationally-acceptable accounting standards. To move ahead with accounting system reforms, Japan will need to respond promptly to changes in domestic and international markets, identifying practical accounting issues promptly and designing solutions matched to
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accounting realities. One example of an area where accounting standards need to be altered in line with market changes is the expansion of market-value accounting. Since the 1980s, the evolution of information technology and financial engineering have created more sophisticated markets as a result of the growing value of capital transactions and the development of derivatives, boosting investors’ need for market value information. New accounting standard tools will have to be constantly developed to accurately reflect business realities while also responding quickly to technological innovations and changes in corporate organization. To ensure a flexible response to market needs, rule-making should be entrusted to those familiar with the way in which actual business is changing. Moreover, independent institutions free of the influence of parties with particular vested interests are in the best position to create clear, transparent rules. With these elements in mind, Japan is currently looking into establishing a permanent private-sector institution to play the central role in setting accounting standards103. The IASC is expected to push through major organizational reforms, steadily increasing its influence over international accounting standards. Given this prospect, it will be vital that Japan improve its accounting standard setting functions with reference to the views of practicing accountants, while also proactively stating its views in international discussion fora104. (b) ISO/IEC led international standardization activities Standards 105 entail levels established on product quality, performance, safety, dimensions, trial methods, etc., which at the international level become international standards. International standards comprise de jure standards created by public standardization institutions and de facto standards determined by corporate competition in the market. De jure standards are primarily developed by the ISO and IEC, which are private-sector groups. Fueled by the WTO/TBT Agreement requiring that member countries in principle use international standards as a basis for the creation of domestic standards, international standardization activities have taken on growing importance in recent years. However, Japanese companies have for the most part been negative toward these. For example, Figure 4.2.17 looks at duties undertaken by countries handling
103 To date, the Japanese standard establishment process has entailed the Business Accounting Council (Ministry of Finance) creating a brief, with the Japanese Institute of Certified Public Accountants laying down practical guidelines and the Ministry of Finance putting together government and ministerial ordinances. 104 However, even rule-making spearheaded by private-sector groups requires clarification of how such rules will be given model status, who will bear the operational costs of the group, and whether the group’s independence and transparency can be maintained. 105 “Standards” in English is translated as both “hyoujun” and “kikaku” in Japanese. “Hyoujun” usually has the wider definition, while “kikaku” is frequently used to indicate de jure standards, but there is no strict distinction between the two.
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technical and administrative work, who play an important role in the creation of standards by ISO committees. While Japan has taken on more duties over the last several years, it has yet to parallel other developed countries. Further, while Japanese personnel take part in ISO international standards deliberations, they seldom lead this discussion, and Japan submits few standards proposals. Recently, there have been cases where the inadequate reflection of the views of Japanese companies at the rule-making stage has left these companies to cover the cost of standard compliance later on, as exemplified by the introduction of the ISO 9000 series on quality control systems in 1987106. Japan’s standardization activities have pivoted around the government-formulated Japanese Industrial Standards (JIS) system, with the government paying little attention to private-sector initiatives. Now, however, to promote private sector-led international standardization work, efforts are being made to have industry shoulder such standardization as part of corporate activities, while the government develops the necessary infrastructure to support the private sector in its endeavors107. For
106 ISO 9000 is an international standard developed in 1987 to deal with corporate quality-control systems, and has now been widely adopted both domestically and internationally as a transparent standard in selecting business partners in international transactions. When the standard was first introduced, it had little appeal for Japanese companies, most of whom already had their own high-level quality control systems, such as TQM and QC circles. However, as ISO 9000 became an essential element of international transactions, they had little choice but to swallow the compliance costs entailed, for example, by setting up in-house specialist organizations to deal with standard acquisition. ISO 9000 was heavily amended at the end of 2000, at which time Japan participated in the core group from the drafting stage, resulting in a standard which reflected most of Japan’s concerns. 107 In terms of a greater emphasis on private-sector initiative, the Japan Industrial Standards Committee (2000) recommended that (1) the JIS standards creation deliberation system be rebuilt in line with private-sector standardization needs, and (2) that incentives be strengthened for private-sector standards creation (giving copyrights to the initial drafters of JIS standards, etc.).
0
20
40
60
80
100
120
140
160
90 95
Japan USUKGermanyFrance
Figure 4.2.17 Trends in the number of TC/SC secretariats of ISO(The Number of secretariats)
(Year)
Notes:1. The number of duties includes the business ISO/IEC Joint Technical Commitee1.
2000
2."TC"stands for "Technical Committee","SC" for "Sub-Committees".
Source: MEMENTO (ISO).
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Figure 4.2.18 Relation between governments and international standardization agencies US UK Germany France Canada National Standards Body （ＮＳＢ）
American National Standards Institute(ANSI)
British Standards Institution(BSI)
Deutsche Institut fur Normung (DIN)
Association Francaise de Normalisation(AFNOR)
Standards Council of Canada(SCC)
Government Agency National Institute Standards
and Technology, Department of Commerce
Department of Trade and Industry
Ministry of Economy and Technology
Ministry of Economy,Finance,and Industry
Related federal government agencies
NSB mode and powers A memorandum of understanding between the government and the ANSI gives the ANSI the power to formulate national standards.
Independent private institution.While no system is in place for the government to support standardization through legislation,the BSI is supported based on the 1829 Royal Charter.
Because the DIN was launched in 1917 as a private organization run by industry, no establishment law exists. DIN formed a contract with the federal government in 1975, and is designated with the authority to develop national standards now.
Given direct involvement through a 1941 standardization law, with a wide range of powers granted through a 1984 government decree.
As the SCC is a public institution (an independent administrative corporation) established through the SCC Act, the body has greater substantive involvement than other Western institutions.
Government involvement Government personnel participate on the ANSI board of directors as directors. Their right to comment on standard amendment or suspension of development is, as with other members, limited to expressing their opposition as part of the process.
While there is no law stipulating government participation in the Standard Committee, three government representatives take part in the BSI’s Standard Committee. Government officials from the relevant ministries also participate on sector boards and the TC.
Representatives from the relevant government agencies participate in the Council and the TC. However, they participate only as ordinary Council members, with no mechanism in place giving government final approval over national regulation formation.
The government has the right to veto AFNOR standards proposals (although seldom utilizes this). Representatives from the relevant ministries participate on the AFNOR board of directors.
Representatives from the relevant federal and local governments participate on the SCC Council as directors.
Funding source (1999 data) The ANSI receives no government subsidies. Publications account for 58% of its income, membership fees 14%, certification 4%, and other services 24%.
Standards sales account for 59% of the income of BIS’s standards development section, membership fees 20%, government subsidies 12% and project budgets 9%.
Government subsidies provide 12% of the DNI’s overall budget, but this is only allocated to committees contributing to the public good—safety and the environment—with these funds monitored to ensure that they do not flow off into other sectors.
A breakdown of the AFNOR budget as a whole (certification services) presents 21.4% drawn from government subsidies, 26% from standards sales, 5% from membership fees, 45% from services (contracts 14.8%, consultation, training and international support 16.8%, certification 7.7%, other services 2.2%), from other sources 6.5%.
Half of the SCC income comprises government subsidies. The remainder is the income it derives as a national certification institution and income from publications.
Source:METI.
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example, where Japan’s standardization once centered around the creation of industrial standard proposals (JIS proposals) in line with Article 11 of the Industrial Standardization Law, this law was amended in 1997 to simplify the system whereby private-sector groups, etc., make JIS proposals (Article 12) in order to encourage more active private-sector involvement108. The US and Europe, on the other hand, have taken a “strategic standardization” line, seeking active involvement in the ISO/IEC as a means of expanding their markets by having their own standards adopted internationally. Private-sector groups are often the main force behind their standards formulation work (Fig. 4.2.18) 109 , while individual companies often taking on administrative work for ISO/IEC committees. The private-sector is therefore actively involved in standardization, backed by indirect government support110. This proactive European involvement in international standardization stems from the private-sector’s awareness of the importance of standardization work and its strong tradition of active participation, and it will be crucial that Japan too create the necessary conditions to encourage rule-making led by private-sector initiative. Government tasks are also taking on a growing importance, such as the creation of standards of a public-interest nature which are not as readily effected through market mechanisms—for example, standards concerning safety and the environment. Other areas falling within the province of government include consumer protection, R&D toward more active proposal of international standards by Japan, provision of information to industry, and human resource development. Further, because ISO/IEC international standards formulation is determined through a one-country, one-vote majority-decision formula, outstanding technology 108 The amended Article 12 of the Industrial Standardization Law leaves in place the procedure whereby the Japan Industrial Standards Committee is asked for its views in the case of draft proposals by private-sector groups, etc., in areas where the relevant Minister determines that an industrial standard does not need to be formulated, but in cases where the Minister deems such industrial standard formulation as necessary, this procedure is skipped, and the draft directly referred to the Committee (Standards Department, Agency of Industrial Science and Technology, MITI, 1997). 109 In around 80 ISO member countries, national standards institutions are government bodies, non-government institutions in the case of around 50 member countries. 110 Where Europe has traditionally spearheaded international standardization, in recent years it has been seeking to create links with standardization right from the R&D stage as a means of strengthening industrial competitiveness (e.g., the Eureka Program and Framework Program, European Commission international joint R&D systems). These efforts are producing tangible results in the form of international standardization of mobile phones (the European mobile telecommunications standard GSM). In the US, the government formerly created essential standards itself, while standards used by the private sector were left to private-sector standardization to allow market mechanisms to work, but in recent years, stronger awareness of the strategic importance of standardization has spurred rapid growth in the number of ISO/IEC administrative duties taken on by the US, as well as the number of US international standards proposals, on top of which the National Technology Transfer and Advancement Act was adopted in 1996, strengthening government and private-sector ties.
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does not necessarily become the international standard. To ensure that top-flight Japanese technology is granted this status, Japan needs to pursue international cooperation. Particular attention is being paid to the creation of cooperative relations with the Asia-Pacific countries, standardization latecomers, with human resource development and joint standards development projects underway. Such tie-ups with its Asia-Pacific neighbors form the basis of Japan’s build-out of strategic standardization. In February 2001, the Japan Industrial Standards Committee (JISC) began work on an area-specific standardization and internationalization strategy delineating standardization needs, order of priority, and the division of roles between the government and the private sector. This strategy is intended to provide guidelines for a more aggressive approach to standardization at home and abroad. (c) Government-private sector roles in e-commerce rule-making E-commerce requires fast rule-making, while the sound development of the e-commerce market will hinge on creating transparent market rules which provide for safe, universal participation in transactions. In terms of legal infrastructure, Japan formulated the IT Basic Law (Basic Law on the Formation of an Advanced Information and Telecommunications Network Society) in November 2000, as mentioned in Section 1, Chapter II, and passed the Law Concerning Electronic Signatures and Certification Services, launching a fully-fledged strategy toward the creation of an IT-based economy. METI is also engaged in discussion in the Information Economy Committee and Consumer Policy Committee of the Industrial Structure Council toward the establishment of new systemic infrastructure. At the same time, given the speed of innovation in the e-commerce field, early introduction of regulations could limit the scope for free-ranging activity by the private sector. Government regulatory intervention which hampers productive initiatives on the part of the private sector should be avoided to the greatest extent possible, with all care taken not to damage private-sector dynamism. For example, in formulating legislation on electronic signatures, efforts were made to preserve technological neutrality because of the risk that recognizing the legal effect of only certain types of technology in the rapidly-changing IT area could obstruct technological progress. More specifically, although most electronic signatures used today have a public key cryptosystem, specific types of technology or methods have deliberately not been specified for electronic signatures legally in order to leave open the possibility of using new encryption and electronic signature technology57. The same law also allows private-sector groups to handle authentication in order to provide users with the freedom of choice in terms of authentication
57 Sakai(2000).
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services58. There are also cases where the private sector has taken the initiative and formed voluntary rules. For example, the Japan Direct Marketing Association and the Japan Chamber of Commerce and Industry began operation in June 2000 of an online trust mark, providing these marks to companies taking appropriate steps to protect consumers, the aim being to allow consumers to feel confident in shopping on the Internet. As similar systems are in place abroad, including the Better Business Bureau (US) and Trust UK(UK), consideration is also being given to possible international linkages and cooperation among these. For example, in addition to bilateral moves toward linkage, the GBDe (see Column 10) is looking at creating an integrated trust mark. Further discussion will be needed on this, however, in terms of operation methods and arrangements.
58 A system for certification by the minister in charge is stipulated as a means of gauging the reliability of authentication services (Chapter 3 , Law Concerning Electronic Signatures and Certification). This system has been made voluntary so as not to hamper the free provision of diverse services by private-sector groups, and uncertified companies are also permitted to engage in authentication services.
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Section 3 Toward the strategic development of external economic policies
【【【【Key points】】】】
1. Changes in the external economic policy environment The functions of the WTO which Japan has enjoyed to date—trade rules applied widely to member countries based on consistent principles and neutral dispute settlement procedures—cannot be replaced with free trade agreements (FTAs) or economic partnership agreements (EPAs). The WTO will therefore remain the focal forum for Japan. At the same time, with the WTO losing its agility as the number of member countries increases, recent years have seen a surge in the number of strategic FTAs concluded by the EU, Singapore, Mexico, Chile and other countries. Today’s FTAs are characterized by (1) the growing number of FTAs among countries which are not in close geographic proximity as a means of establishing a regional trade and investment base, and (2) the conclusion of agreements aimed at establishing de facto standards for trade rules . 2. Analysis of theoretical and empirical aspects of regional integration Theoretical frameworks concerning the economic effects of FTAs and other forms of regional integration can be divided into static effects, whereby lower tariffs bring about greater efficiency in resource allocation, and dynamic effects, which impact on economic growth through greater productivity and capital accumulation. A dynamic time-path analysis is also being developed as a tool for analyzing whether FTAs promote multilateral trade liberalization or obstruct it. Based on these theories, Japan will need to explore the possibilities for EPAs and other bilateral agreements which complement multilateral liberalization. Empirical analysis confirms that since the conclusion of NAFTA, (1) the GDP of NAFTA members has grown steadily; (2) the intra-regional trade ratio has improved; (3) direct investment within the region has increased; and (4) the unemployment rates of member countries have fallen slightly. In the case of the EU, (1) intra-regional GDP growth rate trends have improved by 1.1 percent since the 1992 market integration; (2) direct investment within the region has increased; and (3) greater intra-regional competition has emerged (reduction of price disparities). 3. External economic policy challenges in the 21st century Given the changes in the socioeconomic environment described above, breaking the Japanese economy out of the occlusion described in Section 1 will require actively pursuing external economic policy, retaining the WTO as the central axis. At the same time, in advancing its external economic policy, Japan will need to make multi-layered use of diverse fora as a means of (1) promoting expedient rule-making, (2) maintaining the multilateral liberalization momentum, (3) gaining experience with various types of international rule-making, (4) avoiding the demerits arising from not concluding FTAs and EPAs, and (5) undertaking domestic structural reform. Immediate policy issues in terms of external economic policy are (1) to boost WTO
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credibility and launch a new round, (2) to make use of regional fora such as APEC and ASEAN+3, and (3) to work on bilateral agreements such as the Japan-Singapore Economic Agreement for a New Age Partnership. Necessary conditions in optimizing the effect of this multi-layered external economic policy will be (1) to match the growing negotiating speed of other countries in (2) developing organic linkages among the various negotiating fora, (3) while also maintaining WTO consistency. Fulfilling these conditions simultaneously will be no easy task, but bolding addressing this challenge will be critical in achieving the early revitalization of the Japanese economy. 1. Changes in the external economic policy environment While Japan has traditionally pursued external economic policies grounded in WTO rule-making, the external economic environment is currently in the process of dramatic change. The following section identifies those changes which Japan will need to take into consideration in designing and implementing 21st century external economic policy. (1) Status of WTO rule-making (a) Growing membership and broader agenda As observed in the last section, where the WTO had a limited membership of 23 countries at the time of the first tariff negotiations in 1947, the year before the GATT was established, this has now grown to 140 111 (Fig. 4.2.8). Consequently, a sufficiently wide-ranging agenda now needs to be set to respond to the concerns and interests of all WTO members and maintain their incentive to participate. Compared to the former emphasis on tariff negotiations, however, where the significance of participation was evident to all members, the more diverse agenda which today’s WTO negotiations address has meant that an enormous amount of time and energy is consumed right from the stage of garnering understanding and sharing of awareness on the significance of the various agenda items. The larger membership and wider-ranging agenda are beginning to slow the pace of WTO negotiations and making it increasingly difficult to reach agreement112. For example, the 1999 WTO Ministerial Conference in Seattle failed to achieve a convergence of national positions in regard to labor, the environment, competition, investment, anti-dumping and other agenda items not just in terms of subjects and modes of negotiation, but even the need for negotiations. This failure was one major reason that the next round was not launched as scheduled.
111 Number of member countries as at November 2000. 112 Main candidates as negotiation areas in the next WTO round include not only the built-in agenda of agriculture and services, but also tariffs on manufactured goods, investment, competition and the environment. See White Paper on International Trade 2000 on trends in the negotiation agenda over the various rounds.
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(b) Declining predictability in terms of the impact of liberalization commitments and system construction Traditional negotiations have generally adopted request-and-offer and formula negotiation modes. The former entails two countries exchanging lists of areas in which they wish to see tariff reductions, with negotiations advanced in such a way as to ensure eventual equitable tariff reductions by both parties113. The formula mode reduces tariffs either across the board or according to the level of economic development of negotiating parties in line with the reduction rates and degree of reduction initially determined. When tariff reductions were the main negotiating focus, whichever of the above negotiation modes was employed, it was comparatively easy for national governments to predict at the negotiating stage the ultimate impact of tariff reductions on import and export volumes. Today’s negotiations, however, reach out as far as services liberalization requiring domestic regulatory reform, the construction of systems in e-commerce and other new areas, and social policy areas such as labor and the environment. As a result, it is now far more difficult to make quantitative predictions as to the impact of liberalization commitments and domestic systemic changes. The declining predictability of the outcomes and side-effects of negotiations is another factor standing in the way of swifter WTO negotiations. (c) Paradox between degree of liberalization achieved and negotiating strength WTO liberalization is based on the principle of reciprocality, whereby members extend the benefits of their liberalization efforts to other members. In other words, rather than unilaterally demanding that other countries liberalize, such requests need to be accompanied by a degree of liberalization at home which other countries will find sufficiently appealing. The previously-mentioned request-and-offer mode is basically a concrete expression of the spirit of reciprocality. Today, however, a side-effect emerging from the request-and-offer mode is the paradox whereby the more a country liberalizes, the more its negotiating power declines. More specifically, when developed countries which have made significant progress in tariff reduction request liberalization from developing countries, they have little left to offer in return in terms of further liberalization of their own. As a result, the negotiating power of the developed countries is falling away, which is also slowing the reaction time of the WTO negotiations themselves. (2) Foreign moves to conclude strategic FTAs Since the late 1990s, interest has grown worldwide in concluding bilateral and regional FTAs. FTAs concluded since 1999 in particular have been distinguished from conventional regional integration by the change in the degree of geographical proximity between FTA partners and by the deepening content of agreements. Japan
113 Tariff negotiations based on the request-and-offer approach have achieved a bilateral balance in offer levels through quantitative predictions of expected import increase rates.
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too will need to respond actively and strategically to this new development. (a) Change in degree of geographical proximity between FTA partners More than 100 FTAs have been notified to the WTO since the establishment of the European Economic Community114 in 1957, but where around 95 percent of FTAs (107) have been formed among countries within the same region, only 5.3 percent (six) were among countries from different regions (Fig. 4.3.1.) 115 . Since 1999, however, a string of FTAs have been formed between countries from different regions (US-Jordan, EU-Mexico, etc.), while further integration has been undertaken between FTAs from different regions (EU-Mercosur). Since 1999, while not yet notified to the WTO, at least 12 trans-regional FTAs have been signed, negotiations launched, or agreement reached to launch negotiations (Fig. 4.3.2). The aim of these FTAs is to establish regional trade and investment points, reaching swift agreement with trade and investment partners important for reasons other than geographical proximity and actively soliciting domestic market participation by foreign funds, managers and engineers, thus stimulating the domestic economy. For example, countries currently proactive toward FTA conclusion include Singapore in the case of Asia, Mexico in Latin America, and Chile in South America, all of which are proactively engaged in forming FTAs with countries of major economic scale, such as the US, Japan, the EU and Canada (Fig. 4.3.3)116. In Europe too, where the EU has traditionally strengthened economic ties with the Mediterranean countries and other geographical neighbors, it has also shown a strong interest recently in concluding FTAs with far more distant partners, as seen in the conclusion of the EU-Mexico FTA and the launching of FTA negotiations with Chile and Mercosur (Fig. 4.3.3). While some analysts view the recent trend toward FTAs as revisiting the bloc economies of the early 20th century, the emergence of transnational FTAs in fact suggests the strong possibility of the further evolution of cross-regional FTAs in the 21st century. (b) Deepening FTA content The second characteristic of contemporary FTAs is their expansion beyond the traditional elimination of regional tariffs and non-tariff barriers to encompass new areas in which even WTO rule-making has not yet proceeded sufficiently, such as
114 The title which this body was given in 1957 when the Treaty of Rome was concluded. Under the same treaty, which went into force in 1958, intra-regional tariffs and quantitative trade restrictions were to be eliminated, establishing regional common tariffs on extraterritorial goods and common trade policies. A customs union was formed in July 1968 without waiting for the end of the transition period. The Merger Treaty, which went into force in 1967, integrated the EEC, the European Coal and Steel Community and the European Atomic Community, forming the European Community. 115 Of FTAs notified to the WTO up to June 2000, around 85 percent involved Europe (Near and Middle East and Africa included). 116 Excluding that between the EU and Singapore. NAFTA, Chapter 13.
Note: As at June 2000. The number of FTAs notified to the WTO is the total number notified based on Article XXIV of theGATT and the enabling clause. “Europe” includes the Near and Middle East and countries on the African continent, while“Asia” includes the countries of Oceania, and “Americas” includes the American continent and the Caribbean Islands.Source: Created by METI from WTO materials.
Date ofnotification
Figure 4.3.1 Number of FTAs notified to the WTO Cross-regional FTAs
6（（（（5.3%）））） 113Total
Intra-regional FTAs
107（（（（94.7%））））
Europe-Americas Europe-Asia Asia-Americas
Signed (figures inbrackets indicate theyear of signature)
Figure 4.3.2 Trends in the conclusion of cross-regional FTAs
Note: As at March 2000. As only publicly announced agreements have been included, this list is not necessarily comprehensive. “Europe” includes the Near and Middle East and countries on the African continent, while “Asia” includes the countries of Oceania, and “Americas” includes the American continent and the Caribbean Islands. Source: METI research.
Figure 4.3.3 Trends among countries actively pursuing FTA conclusion
Singapore Mexico Chile EU(*3)
Concluded FTAs
New Zealand US, Canada (NAFTA) EU EFTA Chile Israel Northern triangle countries(*1) Dominica Nicaragua Costa Rica Bolivia
Canada Mexico Latin America(*2) Venezuela Colombia Ecuador Mercosur Peru Bolivia
Lithuania Estonia Latvia Faroe Islands Slovenia Mexico Morocco Palestine Tunisia Israel Egypt Jordan South Africa
FTAs under negotiation
US Japan Australia Canada Mexico
Singapore US EU EFTA Korea Panama Cuba
Mercosur(*4) Chile Algeria Lebanon Syria
Private-sector-based research
Japan (completed) Japan (completed)
Notes 1. Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.. 2. El Salvador, Honduras and Guatemala. 3. EU FTAs include trade development cooperation agreements, association agreements, customs unions and free trade areas notified based on GATT Article XXIV. 4. Argentina, Brazil, Paraguay and Uruguay. Sources: Press releases, European Commission (2000), government web-sites.
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investment, competition, greater personnel mobility, e-commerce, the environment, and the harmonization of job-related systems. In other words, areas which are necessary in boosting not only goods liberalization but also the mobility of money, personnel, services and information are being flexibly incorporated into FTAs to ensure the development of domestic competition environments and to promote bilateral trade and investment (Fig. 4.3.4). The recent boom in FTAs including rules for new areas has been spurred by a new awareness that flexible rule formulation and dissemination between two countries with common interests is an effective means of seizing the lead in the creation of multilateral rules in new areas. Such FTAs basically aim to establish de facto trade standards. In other words, by first creating rules on new areas at the bilateral level, countries are aiming to achieve the following: (1) to build up knowhow and experience regarding system construction in said new areas; (2) to feed back the accumulated knowhow and experience, as well as success stories, into multilateral negotiations as components in agreement formation; and (3) ultimately, to play a central role in developing multilateral trading rules originating from rules of that country’s creation. For example, the WTO/GATS Basic Telecommunications
General exceptions ■ ■ ■ ■ ■ ■ ■Economic and technicalcooperation
■ ■
Joint committees ■ ■ ■ ■ ■
E-commerce ■
Personnel mobility ■ ■ ■ ■
Environment ▲ ■ ▲
Labor ▲ ■ ▲
Figure 4.3.4 Comparison of items covered by FTAs
Note: The labor- and environment-related rules included in NAFTA and the Canada-Chile FTA are stipulatednot in the main agreement but in supplementary agreements. ANZCERTA is the abbreviation for the Australia-New Zealand Closer Economic Relationship Treaty Agreement.Source: Japan Machinery Export Association (2000).
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Reference Paper contains the same provisions 117 as in the NAFTA telecommunications rules118. Further, while the US-Jordan FTA is the first such agreement to include environment- and labor-related provisions in the main text, the US has announced that the same rules will be applied to FTAs with Chile and Singapore119. 2. Analysis of theoretical and empirical aspects of regional integration As FTAs and EPAs 120 are forms of regional integration 121 , theoretical and empirical analyses of these are generally developed based on the same methods of economic analysis as are used for regional integration122. The purpose of this sub-section is to examine (1) the theoretical framework of regional integration, and (2) the results of empirical analyses of the effects of existing regional groupings such as NAFTA and the EU. Economic theory to date on FTAs has focused on the traditional tariff elimination effect (static effect), the impact on economic growth brought about by increased productivity and capital accumulation (dynamic effect), and politico-economic arguments. In terms of empirical analyses, numerous simulations of FTA conclusion using a general equilibrium model have been made, as well as numerous ex post facto evaluations on FTA effects. It should be borne in mind that because EPAs include WTO-plus rules on investment, competition, human mobility, the environment and labor, the ultimate economic effects of these will go beyond the effects of the traditional FTAs described below. (1) Economic theory on regional integration The economic effects of FTAs and other forms of regional integration are divided into a static effect, whereby standard tariff reductions impact on the efficiency of resource allocation, and a dynamic effect, whereby higher productivity and capital accumulation impact on economic growth. Recent economic analyses of FTAs have included many politico-economic arguments which incorporate the behavior of domestic interest groups in their models, and these look at whether expanded regional
117 Regulations for the prevention of anti-competitive behavior by domestic monopolies, the transparency of charging information concerning mutual connectivity, and transparent notification, licensing and registration requirements, etc. 118 NAFTA, Chapter 13. 119 USTR (a), USTR (b). 120 See Chapter IV, Section 1, Footnote 15 for the definition of EPAs used in this White Paper. 121 Regional integration can be divided into a number of stages, including FTAs, customs unions, common markets, economic union, and complete integration (Balassa, 1961). Refer to the White Paper on International Trade 2000 for an explanation of types of regional integration. 122 For example, because of extra-territorial tariff establishment methods and the presence of rules of origin peculiar to a particular FTA, the effects of regional integration can differ according to the mode of integration. EPAs too, which include rules on investment, services, competition, intellectual property rights and the facilitation of human mobility, will undoubtedly produce different effects from FTAs centered around conventional tariff reductions. However, many of the static and dynamic effects of regional integration are shared by all integration types. Discussion below therefore focuses on the economic effect of FTAs except where a particular disparity exists.
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integration or multilateral trade liberalization is the more likely to achieve speedy worldwide trade liberalization. Some models take a positive view of FTAs, others a negative view, but both provide valuable insights for Japan in considering the conclusion of EPAs and other agreements in the years ahead. (a) Static effect123 (Trade creation effect and trade diversion effect) The elimination of trade barriers between parties to an FTA changes the prices of goods and services traded between these parties, in turn affecting trade volume and economic welfare both between the parties and with extraterritorial parties. In cases where the removal of trade barriers leads to the further expansion of the trade traditionally conducted between the parties (trade creation effect), consumers in the importing country will be able to consume imported goods and services more cheaply, while producers in the exporting country reap a profit as a result of expanded exports, improving the economic welfare of parties to the FTA. On the other hand, because FTA-induced barrier elimination is restricted only to parties to that FTA, duties will be levied on imports from extra-territorial countries able to produce certain goods at cheaper cost, resulting in a shift to imports from other FTA parties whose goods might be more expensive but on which duties are not imposed (trade diversion effect). Cases therefore emerge in which the welfare of not only extra-territorial countries but also of the actual parties to the FTA declines124. Whether the conclusion of an FTA diverts or creates trade depends on the country and the industry, while final economic welfare will also differ according to the respective consumers, producers and other economic players. Even among producers, depending on whether the producer is an exporter or an importer, or on the degree of competitiveness of goods and services, the direction and extent of the impact which the FTA has will vary. In assessing the economic effects of FTAs, therefore, the evaluation should deal with each industrial and economic entity separately to the greatest extent possible. In addition, in theory the “first-best” policy for the world as a whole would be non-discriminatory liberalization within and beyond parties to particular agreements, and it should be noted that FTAs which eliminate tariffs preferentially for a limited number of countries are in this sense second-best policies125. Assessment of FTA economic effects therefore requires not simply a comparison of current economic welfare and welfare in the case of FTA conclusion, but also a relative comparison of other policy options, including unilateral liberalization, conclusion of FTAs with
123 The concepts of trade creation and trade diversion are the brainchild of Viner (1950). 124 In the importing country, where the reduction in tariff revenue is greater than the degree of increase in consumer surplus, importing country welfare declines. 125 In the case of large countries, FTA conclusion can be the first-best policy for these countries themselves, but only to the loss of extra-FTA parties. Non-discriminatory liberalization is the first-best policy for small countries.
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other countries, and multilateral liberalization. (Impact of FTA conclusion on welfare changes) Various proposals have been put forward on FTAs for maximizing trade creation or minimizing trade diversion. The “natural trading partner” concept is one approach advocated for maximizing trade creation for FTA parties and indirectly minimizing trade diversion for extra-FTA parties126. There are two main NTP definitions of NTPs. One regards NTPs as countries with a large trade volume between them before FTA conclusion, so that conclusion of an FTA is unlikely to produce unnatural or arbitrary trade flows, heightening the possibility of greater welfare for countries party. This argument provides one standard for determining desirable FTA partners. However, it does have its problems: for example, (1) even where country B absorbs a large share of country A’s exports, A might not absorb a similarly large share of country B’s exports127; and (2) because of the impact of trade barriers and other regional groupings, trade volume before FTA conclusion could in fact be excessive or overly limited. The second argument suggests that geographically close nations are NTPs, as FTA conclusion among such countries saves on export costs, boosting the welfare of countries party. The counterargument is that geographical proximity is irrelevant to FTA parties, with the conclusion of FTAs among countries which are geographically distant but have differing comparative advantages in fact boosting welfare further128. The Kemp & Wan and Ohyama theorems look at FTAs which minimize trade diversion for parties outside the FTA. According to these theorems, where an FTA reduces trade with countries outside the FTA, the level of tariffs on extra-FTA goods can be adjusted to restore trade volumes to the original level. In theory, therefore, the negative impact of trade diversion can be countered129. The major contribution of these theorems lies in being the first to indicate the theoretical existence of FTAs which do not reduce welfare for the countries outside an FTA. At the same time, given that actual trade volumes fluctuate constantly in response to a wide range of factors, it would be difficult to adjust tariffs each time to avoid trade volume changes130. There is also the issue as to whether Article 24131 of the current GATT is adequate in terms of guaranteeing the welfare of extra-territorial countries. For example, while
126 See Wonnacott and Lutz (1989), Krugman (1991b), and Summers (1991) on the NTP argument. 127 For example, while trade with the US accounts for a huge portion of the trade volume of both Canada and Mexico, the share of both countries in total US trade volume is nowhere near as large. 128 Bhagwati and Panagariya (1996). 129 Ohyama (1972), Kemp and Wan (1976). 130 In addition, flexible raising and lowering of extra-territorial tariff rates to maintain trade volumes with countries outside the FTA could contravene Article 24 of the GATT as it currently stands. 131 See Section 3 (5)(a) for an interpretation of GATT Article 24.
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the lower the extra-territorial tariffs established by FTA parties, the less trade diversion might emerge, the current GATT Article 24 stipulation that extra-territorial tariff rates not be raised is not an adequate condition in terms of completely excising trade distortions132. (Special points regarding rules of origin) Unlike customs unions which impose common extra-territorial tariff rates, countries party to an FTA can set their own tariffs for parties outside the agreement. As a result, FTAs establish stringent rules of origin to prevent circumvention of goods from extra-territorial countries through other extra-territorial countries with low tariff rates. The purpose of these rules is to prevent outside countries from free-riding on the FTA, and also to ensure that countries party enjoy the tariff exemptions accompanying it. On the other hand, countries within the region which import interim goods from low-cost extra-territorial companies, process these and then export them to other countries within the region will find that FTA conclusion brings to bear rules of origin which effectively remove the obligation to pay duties, so that where interim goods were imported from a high-cost company within the region, trade diversion could actually increase133. Further, where one country concludes multiple FTAs, the establishment of different rules of origin for each agreement would greatly complicate customs procedures134. (b) Dynamic effect In addition to the static effect, FTAs also affect the economic growth of member countries through the two main stages of productivity improvement and capital accumulation, a dynamic effect135. (Economic growth through greater productivity) Factors behind the FTA-induced boost in productivity include (1) the market expansion effect; (2) the competition promotion effect; (3) the technology spillover effect; and (4) the systemic innovation effect. The first of these, the market expansion effect, refers to the way in which reduced regional trade and investment barriers expand market scale, bringing into play economies of scale which in turn push up productivity. The competition promotion effect derives from the greater competition on domestic markets arising from the inflow of cheap goods and services and the
132 Bhagwati (1993). 133 Krueger (1993). 134 Kimura (2000). 135 Balassa (1961) was the first to argue for the dynamic effect of regional integration, with Baldwin (1989) and others subsequently providing a theoretical framework. Baldwin’s paper was released just before the 1992 European market integration, which sparked a string of empirical analyses of regional economic integration focusing primarily on the static effect of tariff reductions. Baldwin noted that the static effect was only part of the economic integration effect, using an economic growth model to present a theoretical framework on the dynamic effect of regional economic integration.
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Figure 4.3.5 The two dynamic-effect courses
Source: Created by METI. participation of foreign affiliates, again boosting productivity. The technology spillover effect results from the inflow of foreign managers and engineers, encouraging the spillover of top management knowhow and technology into the countries in question and leading to higher productivity. Finally, the systemic innovation effect136 refers to the way in which research and negotiations toward FTA conclusion, as well as consultations after the agreement has been formed, promote the sharing and transfer of knowhow on more efficient policies and regulations among member countries (Fig. 4.3.5, left figure (1)). (Economic growth accompanying capital accumulation) Where the productivity improvement described above occurs, the anticipated profit rates of member countries rise and uncertainty decreases, leading not only to greater domestic investment, but also encouraging the inflow and accumulation of capital from abroad in the form of FDI, contributing to a greater production volume in the countries in question (Fig. 4.3.5, right figure (2)). This capital accumulation pushes up productivity still further as a result of increased R&D investment, creating true feedback. However, where discriminatory measures are adopted in regard to products from outside the FTA area, distortions can arise in world direct investment flows (investment diversion effect). For example, stringent rules of origin imposed by an FTA can lead to the replacement of extra-FTA exports into the region with inward direct investment in the region. Compared to traditional regional integration with its focus on the elimination of tariff barriers, today’s FTAs include rules in WTO-plus areas such as investment, competition, human mobility, the environment and labor. These rules will be effective in maximizing the dynamic effect of FTAs achieved through capital accumulation, competition promotion, and technology spillover. 136 See Kimura (2000) in regard to the systemic innovation effect.
(1) Economic growth induced by greater productivity
Capital accumulation volume
Capital accumulation through higher productivity
Higher productivity through capital accumulation
(2) Economic growth induced by capital accumulation
Capital accumulation volume
Y
Y1
Production volume
Production volume
Y
Y2
K1 K1 K2
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While these are the basic theories on the economic effects of FTAs, the scale of such effects and the routes by which they ripple outward will vary according to the market scale, economic and technological levels, and industrial structure of countries party to the agreement. For example, an FTA or EPA with a developed country which has made significant progress with tariff liberalization, is keen to invest, and possesses high-grade management knowhow and technology will produce a dynamic effect in the form of the inflow of foreign capital and the spillover of technology and knowhow. To maximize the economic effects of FTAs and EPAs, therefore, consideration is merited as to whether the agreement in question is sufficient in terms of providing the key components in economic growth: more efficient resource allocation, greater competition, economies of scale, the spillover of technology, and capital accumulation. Even among types of dynamic effect, where market expansion offers the benefits deriving from the other parties to the agreement opening their markets, capital accumulation, competition promotion, and technology spillover in the home market are benefits which can only be enjoyed by making that market sufficiently open and attractive to foreign companies. (c) Dynamic time-path analysis FTA evaluations should not be based solely on intra-regional liberalization effects, but should also take a long-term look at how the FTA in question might supplement multilateral liberalization. This recognition underlies dynamic time-path analyses137, many of which have already been conducted. However, where some analyses have concluded that FTAs promote multilateral liberalization, others have seen multilateral liberalization hampered by such agreements (Fig. 4.3.6). (Argument that FTAs promote multilateral liberalization) Generally, multilateral liberalization is the first-best policy in the sense that it raises welfare worldwide with none of the market distortions resulting from trade barriers. However, in reality this will be difficult to achieve, given the complex interplay of national interests in multilateral negotiations even as countries seek the ultimate goal of worldwide liberalization. In such cases, FTAs have the potential to promote multilateral negotiations by: (1) increasing negotiation efficiency by reducing the number of negotiating entities; (2) boosting the negotiating power of small countries; (3) reducing the political opposition of weakening industries through progress with domestic industrial adjustment; and (4) encouraging the participation of developing countries in negotiations as a result of economic growth. Further, as FTAs expand in scale, countries not party to such agreements will find themselves at a growing disadvantage, causing a domino effect138 in terms of incentive to participate in FTAs.
137 Bhagwati (1993). 138 The term used by Baldwin (1995) to describe this effect.
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Figure 4.3.6 Impact of FTAs on multilateral trade
①Reduced number ofnegotiating entities(Summers,1991;Krugman,1993)
More progress is made in negotiations among regions than whereindividual countries participate in multilateral negotiations.
②Greater negotiating powerfor small countries (Lawrence,1996)
Where small countries participate in regional groupings, they boost theirnegotiating power in terms of pressuring large countries to liberalize(e.g., MERCOSUR and the US)
③ Progress with domesticindustrial adjustment(Wei and Frankel, 1995)
Because the conclusion of FTAs pushes forward domestic industrialadjustment, the scale of declining industries shrinks, reducing politicalopposition to multilateral trade liberalization in the long term.
④Promotion of domesticreform brings developingcountries into multilateralnegotiations(Ethier, 1998)
The conclusion of FTAs between developed countries and developingcountries negative towards multilateral trade liberalization increases FDIflows into developing countries, advancing domestic reform andliberalization, and, accordingly boosting the incentive for developingcountries to take negotiations forward.
①Greater price control(Kennan and Riezman,1990;Krugman, 1991a）
Where intra-regional trade is liberalized with extra-regional trade barriersleft in place, countries have greater power to control prices on goodsproduced within the region, with extra-regional export prices rising andimport prices falling. Because this brings additional profit to countrieswithin the regional grouping to the loss of extra-regional countries (termsof trade effect), it obstructs extra-regional liberalization.
②Protection of domesticindustries(Grossman and Helpman,1995; Krishna, 1998)
FTAs which promote liberalization only among certain countries enablethose countries to constrain competitive pressure placed on domesticimport industries to a certain extent while still enjoying the benefits ofliberalization, offering potentially greater benefit (to the loss of extra-regional countries) than provided by multilateral trade liberalization.
(Argument that FTAs obstruct multilateral negotiations) On the other hand, it is also argued that where the trade barriers created by FTAs for countries outside such agreements provide rents as a result of boosting the price-control power of FTA countries and allowing the protection of their domestic industries, FTAs will not necessarily promote multilateral liberalization. For example, while for countries party to FTAs, the benefits reaped from liberalization might outweigh those of the rents offered by protection to the extent that FTA membership remains limited, once that membership grows beyond a certain point, deteriorating terms of trade and other factors could reduce liberalization benefits, while lobbying by vested interests could also prevent the achievement of worldwide liberalization139 (Fig. 4.3.7). Particularly in later accessions to FTAs, where the approval of existing
Source: METI.
Figure 4.3.7 Changes in welfare as a result of FTA expansionWelfare
Optimal scalefor FTA Members
WorldNumber ofparticipants
Welfare in thecase ofmultilateralliberalization
Net reduction inrent by protectionIntra-regional
Extra-regionalwelfare
Benefits ofparticipation
0
139 Bond and Syropoulos (1996), Goto and Hamada (1999), Andriamananjara (1999).
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members is needed, existing members could brake expansion of FTA membership at some point in response to the risk of reduced liberalization benefit140. To circumvent this issue, however, introduction has been suggested of a rule that all countries wishing to join the agreement must be allowed to do so141. Above we examined both sides of the debate in terms of whether FTAs are able to promote multilateral negotiations. Those arguing that FTAs promote multilateral liberalization note that while the ultimate goal of all countries is worldwide liberalization, the increasingly cumbersome nature of multilateral liberalization negotiations has in fact greatly lowered the likelihood of achieving this goal unless negotiations are supplemented by FTAs and other similar agreements. Those arguing that FTAs obstruct multilateral liberalization believe that not all countries necessarily share the goal of worldwide liberalization, and are more likely to gravitate toward FTAs as a means of securing preferential benefits. In the real world, countries concluding FTAs have not necessarily adopted either of these extreme positions, operating policy while seeking middle ground. In implementing Japan’s external economic policy, Japan too will need to take into account the above arguments in exploring the possibilities for concluding EPAs which contribute to multilateral liberalization. (2) Empirical analyses of existing regional groupings Next we will turn to empirical analyses of the economic effects of existing regional groupings. The presence or absence as well as the size of the many economic effects suggested by theoretical analysis will differ according to the economic conditions of countries within the grouping. Moreover, each FTA is vested with many expectations and concerns reflecting regional realities. Detailed examination of the effects of regional integration therefore needs to give full consideration to the particular characteristics of each country and each region. In particular, regional groupings of developed and developing countries, which obviously stand at different levels of economic development, and regional integration among developed (or developing) countries at the same level of development will attract very different expectations and fears, and also produce very different results. NAFTA is a prime example of regional integration among developed and developing countries, while the EU represents integration among developed countries. Empirical analyses of expectations and concerns expressed prior to integration are identified below, as well as analyses of predictions of economic effects, while an ex post facto evaluation of economic effects is also provided by examining actual economic indexes. Consideration of the EU will be focused on the 1992 market integration. (a) NAFTA (Expectations and concerns) Negotiations on the North American Free Trade Agreement (NAFTA) started in
140 Similarly, emphasis by policy-makers on the protection of certain industries would cause the momentum behind new accessions to falter. 141 Yi (1996).
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1991, with the agreement entering into force in 1994. NAFTA includes both developed countries (the US and Canada) and developing countries (Mexico), and as such represents economic integration among countries with different economic circumstances in terms of income levels, wage levels and productivity factor utilization potential. Where countries at different levels of development engage in economic integration, disparities in their technology levels and productivity factor utilization potential encourage production specialization in line with comparative advantage and bring about more efficient intra-regional resource allocation as a result of greater intra-regional trade. The movement of factors of productivity is also expected to reduce factor price disparities. Expectations of NAFTA included: (1) reduction of wage disparities among Mexico, the US and Canada, with a consequent drop in the number of illegal immigrants into the US; (2) greater political stability and progress with economic reform in Mexico as a result of economic integration, reducing the uncertainty of investment in Mexico; and (3) the consequent promotion of direct investment in Mexico, which would in turn stimulate the country’s economic development142. Concerns included the possibility that greater trade with Mexico, which has a relatively abundant labor force (unskilled labor), would spur industrial adjustment in North America, with (1) unemployment rising and wages falling for unskilled workers in the US and Canada, and (2) the transfer of production to Mexico, which has looser labor and environment standards, causing Mexican labor conditions to deteriorate and destroying the environment. (Survey of empirical analyses of NAFTA effects) Many quantitative calculations of the effects of NAFTA to date have been made to ascertain the veracity of these various expectations and concerns (Fig. 4.3.16). Some of these are based only on assumptions of tariff barrier elimination, while others include investment liberalization and capital accumulation. Bearing in mind these assumptions, here we examine the results of analyses of key economic indexes. Looking first at the impact of the conclusion of NAFTA on actual income, calculations indicate that income has risen for all three NAFTA members, with many results indicating a major effect on Mexico in particular. This is because, firstly, the US-Canada FTA concluded prior to NAFTA meant that liberalization had a relatively greater impact on Mexico, while it also appears that the smaller a country’s economic scale, the greater the benefits it will reap from an FTA. Still greater impact is indicated by analyses which include the elimination not only of tariff barriers but also of non-tariff barriers in their assumptions, or which take into consideration the dynamic aspect of direct investment in Mexico being spurred by investment liberalization. Both investment and the elimination of non-tariff barriers would
142 NAFTA expectations and concerns were drawn from Brown, Deardorff and Stern (1992), Fernandez and Portes (1998), Francois and Shiells (1994), and Anderson and Snape (1994).
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therefore appear to play a major role (Fig. 4.3.8). In terms of changes in trade patterns, in many cases calculations indicated that trade within NAFTA would expand, but results were divided as to whether extra-territorial trade would grow or decline143. However, as the change in extra-territorial trade volume has been relatively slight, it would appear that any trade diversion effect which did emerge was only minimal. Turning to changes in factor prices, analyses indicated that while wage disparities between Mexico and the US and Canada would decline, the greater productivity resulting from economies of scale would see wages rise in terms of absolute value in all NAFTA member countries. Further, calculations suggested that because employment volume would rise in all member countries, trade with Mexico would not bring about employment uncertainty or wage cuts. (Ex post facto evaluation of economic effects144) Real GDP trends in the NAFTA countries indicate that NAFTA may have had a positive impact in that while Mexico’s growth rate plunged briefly in response to the currency crisis, it has been growing steadily since the 1990s. Moreover, Mexico’s relatively speedy recovery from the 1995 currency crisis compared to the 1982 crisis also suggests a positive NAFTA impact (Fig. 4.3.9)145.
143 Bachrach and Mizrahi (1992), Sobarzo (1992), Brown et al. (1992). 144 The US government report Study on the Operation and Effect of the NAFTA is a key study in terms of ex post facto evaluations of NAFTA. However, because NAFTA has been in place for only a few years, factors such as data shortages have prevented much ex post facto empirical research. Further, a number of major events have also taken place over those years, including the Mexican peso crisis shortly after NAFTA conclusion, the US economic boom, and lower US tariffs as a result of the Uruguay Round negotiations. Excluding the impact of these events to examine the effects of NAFTA alone would be next to impossible. 145 Where Mexico took two years to return to positive growth after the 1982 currency crisis, this was only a year in the case of the 1995 crisis. See Lustig (1997).
US Canada MexicoⅠ 0.02 - 0.32 Elimination of tariff barriersⅡ 0.04 - 4.64 + Investment liberalizationⅠ 0.10 0.70 1.60 Elimination of tariff and non-tariff barriersⅡ 0.30 0.70 5.00 + Investment liberalizationⅠ - - 1.90 Elimination of tariff barriersⅡ - - 8.00 + Investment liberalizationⅠ 0.06 0.50 0.14 Elimination of tariff barriersⅡ 1.51 9.01 2.30 + Elimination of non-tariff barriersⅠ - - 3.10 Elimination of non-tariff barriers + capital accumulation
Ⅱ - - 11.90 + Reduction of uncertainties involved in investing inMexico
Figure 4.3.8 Calculations of impact of NAFTA conclusion on real income of NAFTA members
Young and Romero(1994)
Rate of increase in real income (%)Main assumptions of model
Bachrach and Mizrahi (1992)
Brown et al.(1992)
Sobarzo(1992)
Roland-Holst et al. (1994)
Note: Because Brown et al (1992) do not indicate the change in real GDP, the change in welfare measuredby the equivalent value is shown.Source: METI.
Figure 4.3.11 Changes in the trade share among NAFTA members
Canada
Mexico
Export share Import shareTrade partner
US
As for trade patterns, comparing the ratio of internal and external trade and the average rate of increase, the average rate of increase for external trade between 1985 and 1990 was greater than that for internal trade. However, this situation was reversed in the 1990s, with the internal trade ratio from 1990 to 1999 leaping from 41.4 percent to 53.9 percent (Fig. 4.3.10). Looking at the trade share among NAFTA countries between 1985 and 1997, while there was almost no change in the US-Canada and Canada-Mexico export-import share between 1985 and 1997, US-Mexico trade soared (Fig. 4.3.11). In the case of direct investment, the share of investment received by NAFTA
Figure 4.3.14 Trends in unemployment rates in NAFTA member countries
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members as a percentage of world received direct investment grew steadily from 1990 onward, suggesting that the importance of NAFTA as a host for direct investment is increasing (Fig. 4.3.12). US investment in Mexico dropped temporarily due to the 1995 currency crisis, but since the entry into force of NAFTA, has generally been growing strongly in terms of both investment value and world share (Fig. 4.3.13). Finally, turning to employment volume and wages, given that (1) the number of people using assistance programs146 set up for workers losing their jobs due to NAFTA was a minimal 0.01 percent of the number of layoffs throughout the US at the time147; (2) unemployment rates in the NAFTA countries have dropped slightly since NAFTA went into force (Fig. 4.3.14); and (3) real wages in the US and Canada have barely changed, greater trade with Mexico does not appear to have had a serious impact on US and Canadian workers. Real wages in Mexico have fallen since NAFTA came into force, but the impact of the currency crisis also needs to be taken into consideration in this regard (Fig. 4.3.15). (b) EU (Expectations and concerns) The 1987 entry into force of the Single European Act saw Europe shift into action a program for the formation of a single regional market by the end of 1992. The result was the development of the EC, formerly a customs union, into a common market, and a further step taken from there toward economic union amidst the progressive deepening of integration. Unlike NAFTA and its asymmetrical membership in terms of development stage, the EU comprises developed countries with a comparatively similar level of development, while much intra-regional trade is conducted not among but within industries. NAFTA is also a new grouping, whereas the history of the EU can be traced back to the 1958 EEC (European Economic Community), with progress already made in the long process toward efficient resource allocation and intra-regional trade expansion through the elimination of tariff and non-barrier barriers. Expectations were therefore strong that the 1992 market integration would bring about not so much a static as a dynamic effect, namely that market expansion would boost economies of scale and competition 148 . Conversely, European Free Trade Association (EFTA) member countries, the US and other countries feared the emergence of a “Fortress Europe” whereby integration boosted the competitiveness of EU companies and reduced investment in extra-territorial countries—in other words, investment diversion149. (Survey of empirical analyses of EU effects) Reflecting the above characteristics, many calculations of economic effects in regard to the EU have incorporated both economies of scale and competition promotion effects in their models (Fig. 4.3.21). The results of many of these have 146 The NAFTA Trade Adjustment Program initiated by the US Department of Labor. 147 See Lustig (1997). 148 Flam (1992). 149 See Baldwin et al (1994).
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Fig. 4.3.16 Main empirical analyses of effects of NAFTA Means of analysis Main effects
Bachrach & Mizrahi (1992)
Effect of conclusion of US-Mexico FTA calculated based on a CGE model. Characterized by comparison of impacts based on the presence or absence of capital movement.
① Real income and trade volume in both countries would rise regardless of the presence or absence of capital movement.② Mexico would see a comparatively greater rise in real income. ③ Real income would rise further where there was capital movement, particularly in the case of Mexico.
Brown et al. (1992)
Extra- and intra-regional effect of NAFTA conclusion calculated based on a CGE model. Also takes into consideration the reduction of non-tariff barriers.
① Welfare would improve in all NAFTA countries, with a relatively greater impact in Mexico.② Where Mexico liberalized investment, welfare would improve still further. ③Intra-regional factor prices would rise. ④Intra-regional trade volume would rise, while extra-regional trade volume would fall.⑤ Wage disparities between the US and Mexico would shrink. ⑥ Extra-regional welfare would deteriorate, but only slightly.
Cox and Harris (1992)
Impact of shift from US-Canada FTA to NAFTA calculated, looking particularly at Canada, based on a CGE model. Comparison based on a hub-and-spoke structure, with the US as the hub.
① The US-Canada FTA lifted Canada’s real GDP by around 4.5%. ② Canada’s shift from the US-Canada FTA to NAFTA or to a hub-and-spoke structure would have only a minimal effect.③Mexico’s accession would slightly reduce Canada’s exports to the US.④ Extra-regional welfare would deteriorate, but only slightly.⑤ The greater competition spurred by Mexico’s accession would further boost Canada’s real income.
Roland-Holst et al. (1994)
Intra-regional impact of NAFTA calculated based on a CGE model. Looks at effect of eliminating non-tariff barriers.
① Welfare improves in all intra-regional countries.② Welfare improves more where non-tariff barriers are eliminated.③Effect greater where market structures are not completely competitive.
Sobarzo (1994)
Impact of NAFTA on Mexico calculated based on a CGE model. Includes elimination of non-tariff barriers.
① Where international capital movement was impossible, NAFTA would boost Mexico’s GDP by 1.9% and welfare by 2.3%. ② Where international capital movement was possible, NAFTA would boost Mexico’s GDP by 8% and welfare by 2.4%.③Both wage rates and capital remuneration rates would rise, with employment volume increasing.
Young and Romero (1994)
Calculates the effect of NAFTA on Mexico given the dynamic effect of capital accumulation. Based on neo-classical growth theory.
① Lower tariffs for Mexico would promote capital accumulation and boost Mexico’s real GDP by around 3%② Where Mexico’s real interest rates were lowered as a result of NAFTA reducing uncertainty, greater capital accumulation would be encouraged, boosting real GDP by around 12%.
＜Reference＞ Brown et al.(2000)
Impact of Chile’s accession to NAFTA and the economic integration of the Western hemisphere calculated based on a CGE model.
①Chile’s accession to NAFTA would improve intra-regional welfare, but lower that of other countries. ② Economic integration of the ??Northern hemisphere?? (excluding Argentina) would improve both extra- and intra-regional welfare.③ Changes in welfare would amount to a mere 1% or less of GDP.④ Assuming direct investment into Chile from beyond the region, Chile’s accession to NAFTA would boost its GDP by 5%, marking a relatively large improvement in welfare.
＜Reference＞ Rutherford and Martinez (2000)
Impact of integration of CAM, NAFTA and MERCOSUR calculated based on a CGE model.
① Compared to concluding an FTA with MERCOSUR, concluding an FTA with NAFTA would cause a greater loss in tariff income, but this would be outweighed by the increase in consumer and producer surplus; concluding an FTA with NAFTA would therefore have a greater impact on CAM welfare.② A customs union would boost overall intra-regional welfare further than an FTA.③Only in the case where creation of a customs union led to convergence of external tariffs at the level of the country with the lowest tariffs, extra-regional welfare would also improve.
Source: Created by METI.
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Figure 4.3.17 Calculations of the impact on real income of the 1992 market integration
Rate of increase of real income (%) Main assumptions of models EU EFTA US Japan Market integration Market entry Capital accumulation
I 0.64 - - -
Ⅱ 0.70 - - - ○
Ⅲ 1.79 - - - ○
Smith and Venables(1998)
Ⅳ 2.30 - - - ○ ○
Ⅰ 2.2-2.7 - - - Removal of intra-regional barriers Ⅱ 4.3-4.8 - - - + Economies of scale
Cecchini(1988)
Ⅲ 5.9-6.4 - - - + Economies of scale and competition promotion Baldwin (1989) Cecchini(1988) + 0.6-8.9％ + Capital accumulation
Ⅰ 0.37 - - -
Ⅱ 0.48 - - - ○ Ⅲ 0.67 - - - ○
Gasiorek et al.(1992)
Ⅳ 1.61 - - - ○ ○ Ⅰ 1.00 -0.30 -0.02 -0.02 ○ Haaland and Norman (1992)
Note: As Gasiorek et al. (1992) does not provide calculations for each country, a collective total has been used based on calculation values. Source: METI. indicated that market integration has pushed up real income within the region, while some results also suggest that the real income of other countries, and EFTA members in particular, has decreased. Where calculations consider the promotion of competition through the liberalization of market entries and exits, as well as the economies of scale produced by market integration, the effect on real income both within and beyond the region appears to be substantial. Models that include capital accumulation show that EU market integration stimulated intra-regional investment (investment creation) while reducing investment in EFTA members in particular (trade diversion), with the impact on real income tending to be even greater (Fig. 4.3.17). However, because the actual scale of reduction in the real income of extra-regional countries is reasonably slight, the costs incurred by “Fortress Europe” would appear not to have been that high. (Ex post facto evaluation of economic effects) The European Commission examined the effect of the 1992 EU market integration on real GDP by comparing the estimated value of real GDP for 1993 where the EU economy continued to grow along the same lines as between 1975 and 1987 with the actual value, creating an indirect analysis of the integration effect150. According to the outcome of this analysis, the economic growth rate for 1993 was 1.1 percent up on the original trend, while the extent of departure from the same trend was around plus 0.2 percent in the case of Japan, minus 0.2 percent in the case of the US. It was therefore
150 Monti (1996).
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concluded that integration may have boosted intra-regional real income. In terms of trade changes, where the ratio of intra-regional trade lifted 7.5 percent between 1985 and 1990, extra-regional trade grew relatively quickly in the 1990s (Fig. 4.3.18). This trend seems to have resulted from the spurt in intra-regional trade in the late 1980s, which meant that in the 1990s, greater intra-regional income raised
10
15
20
25
30
35
1980 1985 1990 1993 (Year)
Consumer goodsServicesEnergyEquipmentConstruction
Figure 4.3.20 Trends in price disparities within the EU
Source: European Commission (1996).
Price disparity (standard deviation)
Source: WIR (UNCTAD).
Figure 4.3.19 Trends in direct investment received by EU and EFTA
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
82-87Average
1990 1993 1996 19990%
10%
20%
30%
40%
50%
60%
Value Share of world received investment
($US million) Direct investment received by the EU 15
Note: The intra- and extra-regional trade ratio for 1985 was calculated by METIfrom Direction of Trade Statistics (IMF)
Average rate of increase Ratio of intra- and extra-regional trade
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imports from beyond the region, while the growth in intra-regional production also boosted exports to extra-regional trading partners, inducing a jump in extra-regional trade. Direct investment in the EU grew substantially between 1987 (when the Single European Act went into force) and 1990, and has demonstrated a strong upward trajectory in recent years (Fig. 4.3.19). The EU share of world received direct investment rose between 1987 and 1990, but has been falling away since the 1990s due to the burgeoning of world direct investment as a whole. Direct investment in the EFTA countries has improved fractionally, but given the way in which their share of world received investment plunged in the early 1990s, an investment diversion effect may have occurred (Fig. 4.3.19). Turning finally to the competition promotion effect, where the greater competition anticipated for the EU actually resulted, intra-regional price disparities for the same products should have narrowed. A European Commission report examined this effect by measuring the standard deviation of price disparities from the average, discovering that the price difference grew for energy and construction but shrank for services, equipment and consumer goods, areas in which there was vigorous cross-border trade. Market integration therefore appears to have had a competition promotion effect (Fig. 4.3.20). 3. External economic policy challenges in the 21st century This sub-section discusses Japan’s aims in pursuing multi-layered external economic policies given the changes in the external environment outlined at the outset of Section 3, and examines the current status of Japan’s efforts in the WTO and regional (APEC, East Asia, ASEM) and bilateral fora, as well as future issues. (1) Aims in multi-layered fora utilization Japan’s external economic policy has traditionally been focused on WTO rule-making. This strategy was adopted as a means of avoiding a repetition of the way in which trade protectionism at the outset of the 20th century had become one factor in the outbreak of WWII. It also reflects the enormous importance of a stable multilateral trading order for resource-poor Japan, which depends on trade for its survival as a nation. Even as we usher in a new century, the WTO continues to play a key role for Japan, primarily for the following two reasons. Firstly, the WTO rules are the only multilateral arrangement laying down the basic principles151 and procedures vital in realizing free trade. This remains true even of today’s WTO with its expanded membership and the consequent diversification of areas of concern to members. If the international community was to depend solely on bilateral FTAs and EPAs to achieve global liberalization, not only would a massive
151 National treatment and MFN treatment, etc.
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Analysis method Main resultsSmith and Venables(1988)
Calculation using a partialequilibrium model of thecompetition promotion effect oflower trade barriers where there isimperfect competition.
(1) Assuming a segmented market and a fixed number ofcompanies, an average welfare increase of 0.64% for theEC countries; (2) assuming a segmented market and achanging number of companies, an average welfareincrease of 0.70%; (3) assuming an integrated market anda fixed number of companies, an average welfare increaseof 1.79%; and assuming market integration and achanging number of companies, an average welfareincrease of 2.30%.
Cecchini(1988)
Calculation using a partialequilibrium model of the effect ofthe EU given imperfectcompetition, looking specificallyat reduced trade barriers,economies of scale andcompetition promotion.
(1) A increase in real GDP of 4.3-6.4% for the EUcountries as a whole; (2) lower trade barriers boosts realGDP by 2.2-2.7%; (3) the economies of scale andcompetition promotion induced by market integrationpush up real GDP by 2.1-3.7%.
Baldwin(1989)
Calculation based on Cecchini’s(1988) calculations of thedynamic effects of the EUresulting from capitalaccumulation, comparing thesewith static effects.
Capital accumulation causes a further 0.6-8.9% increasein real GDP.
Gasiorek et al.（1992）
Draws on a CGE model tocalculate the impact of marketintegration on EU membercountries, looking particularly atthe competition promotion effect.
(1) Positive welfare effect on the EU countries; (2) greatereffect where companies can enter markets freely andwhere markets have been integrated.
Haaland and Norman（1992）
Draws on a CGE model tocalculate the impact on not onlyEU member countries but alsonon-member countries of the EUand the expansion of the EU intothe EEA.
(1) A positive welfare effect on the EU countries; (2) aminus welfare effect on non-EU members, particularlyEFTA members; (3) greater effect where companies canenter markets freely and where markets have beenintegrated; and (4) expansion into the EEA has asubstantial positive welfare effect on the EFTA countries.
Baldwin et al.(1996)
Calculates the impact of the EUand EEA on EU member countriesand non-members, looking atchanges in capital accumulation.
(1) EU has a positive welfare effect on EU members,negative on non-members, and particularly EFTAmembers; (2) greater effect where companies can entermarkets freely and where markets have been integrated;(3) dynamic effects created through capital accumulationboost welfare further, but the rise is less than one percent;(4) expansion into the EEA would mean a substantialpositive welfare effect on the EFTA countries; (5) while itis unclear whether extra-regional investment woulddecline, where such a decline did take place, it would begreater for EFTA members.
Figure 4.3.21 Main empirical analyses on the 1992 market integration
Source:Created by METI.
Source: Created by METI.
Figure 4.3.22 Necessary no. of agreements to achieve global liberalization■No. of agreements necessary where allcountries form bilateral agreements = n(n-1)/2 agreements
■No. of agreements necessary wheremultilateral rules are formed in theWTO = one agreement
Examples1. n = 6 countries = 6 * 5/2 = 15 agreements (see left diagram above)2. n = 140 WTO members = 140 * 139/2 = 9,730 agreements3. n = 190 UN members = 190 * 189/2 = 17,955 agreements4. n = 200 countries = 19,900 agreements
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number of such agreements need to be concluded by all the countries of the world, but globally active companies would lose out on the benefits of a consistent worldwide trading order (Fig. 4.3.22). Secondly, Japan has benefited greatly over the years from the WTO’s dispute settlement mechanism. No FTA or EPA could replace the involvement of third parties in the form of a panel, as well as the conduct of procedures according to clear and neutral standards. In fact, it could be said that Japan has only been able to maintain stable regional and bilateral trading regimes because of the WTO-instituted rule of law and dispute settlement procedures. Endeavoring to maintain and expand the multilateral trading order by boosting the credibility of the WTO Agreement and ensuring WTO compliance will accordingly be vital if Japan is to continue enjoying the benefits of free trade in the 21st century. At the same time, shaking the Japanese economy out of its current occlusion will require the simultaneous development of the business environment in both domestic and foreign markets, and optimal external economic policies will have to be constantly drafted and implemented with this national goal in mind. However, due to the two major changes in the external environment noted earlier in Section 3—the increasingly cumbersome nature of WTO negotiations and moves by other countries to form strategic FTAs—depending solely on the WTO is no longer a necessary and adequate condition in terms of the swift and certain achievement of the national target of domestic economic revitalization. Japan will instead need to develop its external economic policies through the flexible utilization of not only the WTO but also regional and bilateral fora for the following four reasons. (a) Expeditious development of new trade rules Firstly, systems have to be constructed quickly to respond to new trade issues for which WTO rules have yet to be formed. For example, as noted in the previous section, the WTO has yet to create international rules for e-commerce. However, given the speed with which business models and technological innovations emerge in this area, systems will need to be developed more than rapidly to ensure smooth trade and investment activities and adequate consumer protection. In areas requiring expeditious rule-making, high-level trade rules geared to the needs of domestic industry and consumers will need to be supplemented at the regional and bilateral levels, sharing the burden appropriately between the government and the private sector152. (b) Means of maintaining the multilateral liberalization momentum Recent moves to form regional and bilateral FTAs and EPAs are not rejecting worldwide liberalization, and do not mean the revisiting of the economic blocs of the early 20th century. Rather, such agreements and the WTO should be viewed as mutually complementary in providing the kind of synergetic stimulation which will
152 Keidanren (“Japan Federation of Economic Organizations”; 2000a).
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promote global trade liberalization. Historically too, moves to establish the EC spurred US negotiation initiatives in the Kennedy and Tokyo rounds of the GATT, while preparation for NAFTA establishment accelerated the Uruguay Round negotiations 153 . Further, as seen in the recent APEC Ministerial and Leaders’ Meetings, strengthening regional cooperative relations is an effective means of creating a constructive environment and making political commitments and statements toward launching multilateral liberalization negotiations. (c) Accumulation of international system-building experience and multilateral trade rule feedback Thirdly, the knowhow and experience acquired in the process of creating high-level trade rules at the regional and bilateral levels can be utilized in future trade negotiations. For example, they can be brought to bear in consensus-building for multilateral rules. Moreover, developing experience in international negotiations and rule-making will allow Japan to guide accelerated progress in other future negotiations and to actively promulgate rules of Japan’s own creation. Developing bilateral and regional trade rules will also help to strengthen cooperative ties with the countries and regions involved, opening the possibility of coordination with these partners in subsequent multilateral negotiations, or, in the optimal case, even the creation of a balanced international trade order which appropriately reflects the particular characteristics of each region. (d) Avoiding the demerits of not forming FTAs and EPAs Fourthly, Japan needs to avert the damage to domestic industry suffered as a result of not forming FTAs and EPAs. For example, Mexico is not only a member of NAFTA, but has also concluded FTAs with the EU and EFTA (Fig. 4.3.3). As a result, when Japanese companies export to Mexico154, they have to pay higher tariffs than levied on Mexico’s FTA partners, which puts them at a disadvantage in terms of business155 (Fig. 4.3.23).
Japanese industry is therefore calling on the government to form an FTA with Mexico to ensure equitable competition conditions with its NAFTA and EU rivals in terms of cost156. Aside from Mexico, Israel and Jordan already have FTAs with the EU and the US, and five other countries are in the process of negotiating FTAs with these two giants. If Japan alone among the major powers does not form FTAs and EPAs, Japanese companies will find themselves at a competitive disadvantage cost-wise in an increasing number of foreign markets (Fig. 4.3.24).
153 See Whalley (1998) in regard to the impact of EC establishment on the Kennedy and Tokyo rounds, and JETRO (1993) on the impact of NAFTA establishment on the Uruguay Round. 154 Companies directly investing in Mexico from Japan are also faced with a similar disadvantage when they procure parts from Japan. 155 See Sub-section 2 for an explanation of this kind of trade diversion effect. 156 Keidanren-Mexican Businessmen(2000).
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Name of country Export value from Japan(1999, billion yen)
Share of total Japaneseexport value
Mexico 500.2 1.05%
Israel 121.4 0.25%
Jordan 18.4 0.04%
Sub-total 640.0 1.34%
Chile 62.5 0.13%Mercosur members Argentine Brazil Paraguay Uruguay
80.6232.7
7.18.5
0.17%0.49%0.02%0.02%
Sub-total 391.4 0.83%
(1)+(2) Total 1,031.4 2.17%
Countries with FTAs with boththe EU and the US (1)
Countries currently negotiatingFTAs with both the EU andthe US (2)
Figure 4.3.24 Countries concluding FTAs with both the EU and the US
Notes: As at the end of February 2000. As Mercosur countries are part of the FTAA, they are considered to be engaging inFTA negotiations with the US. The agreements between the EU and Jordan and the EU and Israel are associationagreements, while the agreement with Jordan is waiting to be put into force. Association agreements are far morecomprehensive than traditional FTAs (tariff reductions), embracing not only trade and economy, but also political dialogueand the promotion of social, cultural and monetary cooperation. In addition to Israel and Jordan, the EU has associationagreements with Tunisia and other countries along the Mediterranean coast. Measures are included to support theeconomic development of partner countries, which are developing countries.Source: Government websites, press articles.
(e) Domestic structural reform catalyst Fifthly, bilateral and regional agreements will be vital in ensuring early domestic structural reform. The elimination of intra-regional barriers through the formation of agreements such as EPAs and investment treaties should stimulate the inflow of capital, management personnel and advanced technology and knowhow from abroad, with the greater competition spurring Japanese companies to remake themselves and consequently revitalizing the domestic economy157. Research and negotiations toward the formulation of these agreements will also provide contact with leading-edge systems developed by partner countries, promoting systemic reform in areas where Japan has been lagging. Forming agreements will not, however, be enough in itself to promote domestic structural reform, and the government will simultaneously need to pursue domestic economic policies consistent with the country’s external policy direction (see Chapter 157 See Chapter IV, Section 1, Sub-sections 2 and 3 on the significance of direct investment promotion as a means of breaking the Japanese economy out of its current rut, as well as issues in investment promotion. The dynamic effects of FTAs and EPAs are explained in Chapter IV, Section 3, Sub-section 2.
Tariff rates for countries withwhich Mexico does not have an
IV, Section 1). For example, as noted in Column 9 in Section 1 concerning the basic strategy158 which the Singaporean government has announced for the 21st century, the government has continued to communicate to the market both directly and indirectly through its statements and actions that its conclusion of FTAs with other countries is not a short-term move but rather part of the process of achieving the goals of that basic national strategy. This kind of consistency and performance in terms of policy direction captures the trust and approval of markets and also reduces the various uncertainties faced by investors, and in this sense is extremely valuable in maximizing the dynamic effects of FTAs and other agreements. (2) Boosting WTO credibility and launching a new round (a) Boosting WTO credibility As noted above, steady implementing the WTO Agreement and boosting its credibility will be vital in ensuring that Japan continues to enjoy the benefits of free trade. The primary issue in this regard will be building capacity in the developing countries which comprise the bulk of WTO membership. This capacity-building was discussed in the previous sub-section as an issue in 21st-century rule-making. As was observed, while the WTO Agreement was extensively strengthened and developed through the Uruguay Round, all members, developing countries included, are now faced with the task of full implementation. While a framework giving developing countries time to deal with the TRIMs and TRIPS was provided in the form of a transition period for agreement conformance, many countries are still having difficulty in this regard. As failure to meet existing commitments could damage the credibility of the WTO system and also create a fracture between developed and developing countries, international cooperation in capacity-building for developing countries must be bolstered as soon as possible. Recognizing this situation, Japan created the Strategic APEC Plan on Capacity-Building, through which APEC will provide support for capacity-building finely tuned to developing countries’ individual needs. Having garnered member economy approval at last year’s Ministerial Meeting, the plan is now moving steadily into action. The Integrated Framework for Trade-Related Technical Assistance to LDCs is also being advanced as a support program for the least developed countries with the participation of institutions such as the WTO, World Bank, IMF and UNCTAD. Such assistance should enhance developing countries’ ability to fulfill their WTO commitments and lend greater stability to the WTO system. Developing countries for their part are seeking the introduction of greater flexibility into WTO disciplines, particularly for those agreements which they are finding difficult to implement (the so-called “implementation issues”). The flexible operation of rules especially for developing countries would normally be an unsatisfactory solution because of the risk of different sets of rules emerging for developed and developing countries, affecting the universality and equitability of the WTO system. However, at the same time, it will be important to make a certain
158 Using incentive policies for foreign companies to position Singapore as an Asia-Pacific hub, converting to a knowledge-intensive industrial structure, and identifying priority industries to be fostered to this end.
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degree of allowance for the circumstances of developing countries, and serious consideration will certainly need to be given to possible solutions, linking these to the new round of negotiations discussed below. Secondly, one essential issue in terms of boosting WTO credibility will be coordination with socio-political goals, such as those related to the global environment. While the various issues are examined in depth in Chapter III, Section 2, the WTO is basically an international institution whose mandate is to stimulate international economic activities through trade promotion. At the same time, as consciousness has risen concerning the downsides of globalization—environmental issues, maintenance of cultural diversity, and the protection of human rights, etc.—pressure has grown for the WTO to respond in due form to these concerns. Moves have even been afoot to have the WTO legitimize trade restrictions as a means of protecting the global environment and human rights. The new mood came to a head at the Seattle Ministerial (November-December 1999), but it would be misplaced to believe that all the blame for the ills of globalization lies at the door of the WTO system, while confusing the efforts which should be made by governments with those appropriate to international institutions is also hardly constructive. On the other hand, as the WTO does have mechanisms for dealing to some extent with environmental issues and other non-economic values, the organization should continue to endeavor to build these new sensitivities into its work program. (b) Launching a new round International efforts continue toward launching a new round of negotiations. Viewing a new WTO round as vitally important in the formation of a new international economic order for the 21st century, Japan has been working toward the launch of this at the fourth WTO Ministerial Conference to be held in Qatar in November 2001. The significance of a new round, Japan believes, would lie in: (1) development of rules in areas currently without disciplines; (2) stabilization of the WTO system as a result of dealing with the developing country issue; (3) stimulation of the domestic economy; and (4) restraint of protectionism. Firstly, the advance of globalization has highlighted areas in which the WTO needs to develop new rules, typical examples of which are investment, competition and e-commerce. The importance of these was examined in detail in the previous section, but while some progress has been made in working groups and other fora, comprehensive multilateral rules have yet to come. A new round would be a golden opportunity to push ahead with rule-making in these areas. Secondly, as noted earlier, a properly-devised response is required from the WTO to certain issues such as capacity-building in developing countries and environmental issues and other strains accompanying the evolution of the world economy. Some should be handled through negotiations—ensuring the consistency of MEAs with the WTO Agreement, for example. Again, a new round will provide an important chance to deal with these issues.
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Thirdly, a new round could play a major role in revitalizing the sluggish Japanese economy through further development of the domestic and external competition environment. It would simultaneously be an opportunity for Japan to design more effective and efficient regulations. Fourthly, new negotiations would curb protectionism. There is strong concern that the weakening of the US economy will be accompanied by an upsurge in international protectionism. The WTO as it stands could hardly be described as unassailable in the face of protectionist pressure. Stable maintenance and development of the WTO system will hinge on continued efforts to liberalize and to create new trade-related rules, constantly counteracting protectionist moves. Anti-dumping litigation in particular has been flourishing worldwide, from 660 cases at the end of 1993 to 1,148 at the end of 1999, an increase of 1.7 times. Further, where only 12 developing countries were engaged in such anti-litigation at the end of 1993, the figure grew 2.3 times to 28 by the end of 1999. While traditionally most anti-dumping measures have been taken by the US and Europe, invocation by developing countries has become increasingly common in recent years. As a result, countries which once instigated anti-dumping measures are now finding the same measures being imposed on their own exports. The EU now has more anti-dumping duties imposed on it than it imposes on other countries, as does the US in all cases except iron and steel. Figure 4.3.25 lists the 10 countries in terms of being subject to anti-dumping investigations, from which it is evident that the US follows only China in terms of the number of investigations to which it submits. Anti-dumping measures against the US are distinguished firstly by the large number imposed on chemicals and pharmaceuticals, and secondly, the fact that almost half are instigated by developing countries (Fig. 4.3.26). Anti-dumping measures are an exception to MFN treatment, and are permitted only to provide relief to domestic industries injured by dumping. Unlike safeguard measures, which are also instruments for the protection of domestic industries, the implementation of anti-dumping measures does not require the government to provide offsetting concessions or consent to countermeasures taken by the trading partner, and utmost care must therefore be taken in invoking them. However, there has been increasing abuse of anti-dumping measures of late. For example, anti-dumping investigations are often commenced even where the necessary requirements have not been met, and anti-dumping duties may be retained long after the necessary
Figure 4.3.26 Number of US-directed anti-dumping investigations and theratio of investigations launched by developing countries
Notes: Cumulative total from 1995 to 1999. “Developing countries” here arethose outside the OECD.Source: WTO materials.
conditions for their levy have been eliminated. In many cases, the abuse of anti-dumping measures results from the technical and complex nature of investigations—calculation of dumping margins and determination of injury, for example—while the Anti-Dumping Agreement is not sufficiently detailed in terms of regulations on these procedures. Many WTO members are therefore interested in strengthening WTO anti-dumping disciplines and reining in the abuse of anti-dumping measures as tools for protectionism and import restriction beyond the limited purposes of such measures. Strengthening existing disciplines would lock in and expand the benefits of trade liberalization which have been accumulated through successive rounds of negotiations. A new round would provide an important framework for achieving these ends.
To ensure high expectations and participation incentive for the new round, the negotiation agenda, modes and schedules also need to be set in such a way as to persuade all member countries that participation in a new round will meet their interests. That will mean, firstly, providing an agenda broad enough to respond appropriately to the wide-ranging concerns of member countries at their diverse levels of economic development. In addition, as observed above, the smooth launch of a new round will depend on maintaining and strengthening WTO credibility.
(3) Utilization of regional fora (APEC, East Asia, ASEM) (a) Asia-Pacific Economic Cooperation (APEC) Launched in 1989 with a membership of 12, APEC now numbers 21 member economies. Unlike other regional groupings, APEC emphasizes voluntarism and advocates open regionalism, extending the benefits of trade and investment
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liberalization to not only member economies but also non-member economies. Based on these precepts, the Second Informal APEC Economic Leaders’ Meeting adopted the Bogor Declaration159 in 1994, while the Osaka Action Agenda was adopted in 1995 and the Manila Action Plan for APEC in 1996, shifting the various APEC “visions” into action. The harvest of the 2000 Ministerial and Leaders’ Meetings in Brunei Darussalam was primarily in two areas. Firstly, APEC clearly indicated its support for a new WTO round, affirming that this would be launched in 2001 and instituting capacity-building cooperation for developing economies to also build confidence in the WTO160. Secondly, APEC established a concrete trajectory for cooperation activities to respond to changes in the external environment by promoting structural reform in areas such as the New Economy, e-commerce, strengthening economic legal infrastructure, and SME and new business support. Where APEC activities have tended to focus on vision development, the recent trend toward tangible cooperation activities indicates a new maturity for the organization 10 years down the road from its foundation161. As mentioned earlier, launching liberalization negotiations and establishing binding trade rules in the WTO takes considerable time. APEC is a non-binding forum with not only the Asian economies but also much of the Americas, and also has a working group system in place to consider specialist areas. As such, it would seem a useful vehicle for liberalization and the establishment of principles, as well as the early realization of systemic integration in the region. (b) East Asia (ASEAN+3, Japan-ASEAN) (ASEAN + 3) The ASEAN, China, Japan and Korea Summit (ASEAN+3 Summit) was held for the first time on the occasion of the 1997 ASEAN Summit, with ASEAN inviting the participation of leaders from Japan, China and Korea, and has since become an annual event. In 1999, the Summit adopted its first Joint Statement on East Asian Cooperation, and decided that meetings of foreign ministers, trade ministers and ministers of finance would be held annually in addition to the Summit as of 2000. The November 2000 ASEAN+3 Summit meeting focused on strengthening regional cooperation in East Asia, and then-Prime Minister Yoshiro Mori proposed three cooperation principles in this regard: (1) building partnership; (2) open regional cooperation; (3) developing comprehensive ASEAN+3 cooperation, including the political-security area in the future. The Prime Minister also announced that Japan
159 This declaration aims at trade and investment liberalization by 2010 for developed economies and 2020 for developing economies. 160 A similar political message delivered by APEC in regard to the Uruguay Round negotiations contributed substantially to the launch of that round. 161 Bilateral free trade agreements, increasingly popular in the Asia-Pacific, were also intensively discussed.
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would hold a "Joint Conference of Government Officials, Prominent Academics and Business Leaders for IT Cooperation in East Asia", and support the construction of common Asian IT engineer evaluation standards12 as approved at the ASEAN, China, Japan and Korea Economic Ministers’ Meeting (AEM+3)162. He lauded the basic principles on swap arrangements as agreed in the Chiang Mai Initiative163, and noted that capital cooperation would be provided to the ASEAN Secretariat to strengthen regional financial cooperation. At the Summit, it was also proposed that the ASEAN+3 Summit be renamed the “East Asia Summit” at some time in the future, and that research be conducted toward forming a free trade and investment area in East Asia. Members agreed that concrete East Asian cooperation, these ideas included, would be discussed from a medium- to long-term perspective in the East Asia Study Group, a body proposed by President Kim Dae Jung of Korea. At the May and October 2000 AEM+3 meetings, members agreed to focus on the three priority areas of trade and investment, IT, and small and medium enterprises as their basic approach to East Asian economic cooperation, and also exchanged views on the new WTO round and other international economic issues. This discussion resulted in a WTO “education session” being held in Kuala Lumpur, Malaysia in January 2001 to promote understanding on the agenda toward a new round. (Japan-ASEAN) One Japan-ASEAN economy-related undertaking is the AEM-MITI164 meeting, which has been held almost every year since 1992. Japan has also worked actively to promote cooperation in the region, including its 1994 advocacy of the establishment of a government-private sector working group for industrial cooperation165 as a means of supporting the accession of the Indochina countries and Myanmar to ASEAN. Since Laos and Myanmar joined ASEAN in 1997 and member countries realized the importance of regional cooperation between Japan and ASEAN due to the deepening economic interdependency and the Asian economic crisis, the AEM-MITI Economic and Industrial Cooperation Committee166 (AMEICC) was newly formed,
12 At the AEM + 3 meeting held in Cheng Mai in October 2000, then-MITI Minister Hiranuma advocated the Asian Common Skill Standard Initiative for IT Engineers, which was welcomed by other participants. This initiative was intended to foster and utilize Asia-wide IT personnel through capacity-building and the creation of evaluation standards for all of Asia. 162 “AEM” is the abbreviation for ASEAN Economic Ministers. 163 An initiative proposed at the ASEAN+3 Finance Ministers’ Meeting held in Chiang Mai in May 2000. More specifically, an expanded ASEAN Swap Arrangement would be implemented among the ASEAN+3 countries and a network of bilateral swap and repurchase agreement facilities established in order to avert a recurrence of a currency crisis through currency loans among ASEAN+3 members. 164 Now known as the AEM-METI meeting. 165 This was originally known as the Working Group for Industrial Cooperation in Cambodia, Laos, Myanmar and Vietnam (or the CLMV Working Group) when established in 1995, but with the accession of Vietnam to ASEAN in July that year, the name was changed to the Working Group for Industrial Cooperation in Cambodia, Laos and Myanmar (or the CLM Working Group). 166 The goals of the AMEICC are: (1) to strengthen ASEAN competitiveness; (2) to promote Japan-ASEAN industrial cooperation; and (3) to support new ASEAN members.
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and the first meeting held in Bangkok in 1988. Since then, a wide range of cooperation has been initiated within the AMEICC framework, including the implementation of government-private sector dialogues in main industrial sectors such as automobiles, consumer electronics and chemicals; the establishment of working groups for human resource development, small and medium enterprises and supporting industries, and development of the West-East Corridor in the Mekong River Basin; and exchanges of views and cooperation in the areas of patents and standards and conformance. Developing wide-ranging dialogue and cooperative ties in East Asia through participation in ASEAN+3 and other Japan-ASEAN fora will be effective in strengthening economic ties with the other Asian countries and of expanding and facilitating trade and investment in East Asia, a region where economic interdependence is steadily deepening. (c) Asia-Europe meeting (ASEM) ASEM, its first summit held in Bangkok in March 1996, aims to promote the development of and exchange between Asia and Europe, to which end the organization engages in comprehensive dialogue and cooperative activities in the areas of economy, politics and culture based on equal partnership between Asia and Europe. In terms of the economy, the first ASEM Economic Ministers’ Meeting, held in Japan in September 1997, agreed on a framework with two main planks, the Trade Facilitation Action Plan (TFAP)167 and the Investment Promotion Action Plan (IPAP). The second ASEM Summit in London in April 1998 saw the adoption of the Asia-Europe Cooperation Framework, stipulating concrete directions for ASEM activities. The second ASEM Economic Ministers’ Meeting in Berlin in October 1999 adopted a new approach, namely that each country report every year on voluntary improvement measures they had taken in regard to the seven TFAP priority areas and the list of nine investment measures found to be most effective in promoting inward direct investment. The third Summit in Seoul in September 2000 decided that the economic, foreign and finance ministers would meet annually rather than once every two years, with the third ASEM Economic Ministers’ Meeting scheduled to be held in Vietnam this fall. While the ASEM structure has therefore been reinforced over the last few years, it differs from APEC in (1) its lack of a secretariat (a group of Coordinators handles liaison and coordination) and (2) the fewer meetings of sub-groups established to respond to individual issues. With European integration maintaining its momentum 167 Seven priority areas were initially stipulated for specific action toward trade facilitation: (1) customs procedures; (2) standards and conformance; (3) government procurement; (4) phytosanitation; (5) intellectual property rights; (6) mobility of businesspeople; and (7) distribution. Electronic commerce was later added to this list.
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and cooperation frameworks such as the ASEAN+3 and Japan-ASEAN meetings emerging in Asia, ASEM will have an increasingly important role to play as a bridge between Asia and Europe, and should perhaps look at bolstering its agenda in the years ahead. (4) Bilateral efforts (a)Japan-Singapore Economic Agreement for a New Age Partnership At talks between then-Japanese Prime Minister Keizo Obuchi and Singaporean Prime Minister Goh Chok Tong on 8 December 1999, the leaders agreed to launch joint research by government officials, academics and industrial representatives on a Japan-Singapore FTA. This resulted in five Joint Study Group meetings over the six months from March 2000 and a final report produced in September (Fig. 4.3.27). The Study Group report noted the need for broad-ranging cooperation which went beyond the limits of the tariff eliminations handled by traditional FTAs to encompass new areas such as investment, competition, digitalization of trade procedures, harmonization of e-commerce-related systems, and facilitation of movement of natural persons, and accordingly labeled the agreement the Japan-Singapore Economic Partnership Agreement (JSEPA)168 (Fig. 4.3.28). In response to the report, further Summit talks on 22 October 2000 decided that formal negotiations toward concluding an agreement would begin in January 2001, to be completed by the end of 2001 at the latest. The first round of negotiations was therefore held from 31 January to 1 February, and the second is scheduled for April169. (b) Strengthening bilateral ties with other countries170 (Mexico) When then-President Ernesto Zedillo visited Japan in November 1998, he proposed consideration of a Japan-Mexico FTA and investment treaty. Joint research was consequently conducted by JETRO and the Mexican Ministry of Commerce and
Figure 4.3.27 Developments related to the Japan-Singapore Economic Agreement for a New Age Partnership
Year Month Main developments 1999 December At a Japan-Singapore Summit meeting, Prime Minister Goh Chok Tong proposes
concluding an FTA, with leaders deciding to launch joint research.
March-September Japan-Singapore Joint Study Group meets five times (Prominent academics, business leaders and government officials)
September Release of the Japan-Singapore Joint Study Group report Keidanren announces Expectations for the Japan-Singapore FTA
2000
October Japan-Singapore Summit. Agreement to launch negotiations toward concluding a bilateral FTA.
January First round of negotiations (in Singapore) April Second round of negotiations scheduled (in Tokyo)
2001
By the end of December Conclusion of negotiations scheduled Note: As at March 2001. Source: METI research.
168 The official title given in the Study Group report is the Japan-Singapore Economic Agreement for a New Economic Partnership. 169 As at March 2001. 170 See Fig. 4.3.29 on moves to strengthen bilateral ties with other countries.
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Figure 4.3.28 Recommendations from the Japan-Singapore Joint Study Group Report
Item Outline
Tariffs Agree to consider tariff liberalization. Respond to sensitivity over certain items, while bearing in mind the WTO rule that tariffs should be eliminated on “substantially all trade”.
Rules of origin Agree on need to create rules of origin to prevent trade circumvention from third countries.
Trade-related procedures Creation of simpler and more efficient trade procedures, consideration of digitalization of trade procedures, etc.
Mutual recognition Consideration of MRA possibilities. Services Support for inclusion of services liberalization in the agreement.
Investment Agree to create model investment framework which could be propagated to other countries.
Movement of Professionals
Recognition of importance of facilitating movement of professionals and the employment and training of skilled personnel.
Competition policy Agree to need to build a competition policy framework to deal with anti-competitive practice.
(1) Liberalization and facilitation
Other Anti-dumping, safeguards, intellectual property, government procurement, etc.
Financial services
Discussion of coordination concerning regulation monitoring, capital market linkages and technical assistance to third countries. Agree that discussion among monetary and financial authorities would be valuable in these areas.
Information and communications services
Recommend pursuing efforts in areas such as (1) protection of personal data / privacy; (2) e-commerce legislation; and (3) regulatory cooperation to range competition in the info-communications sector.
Science and technology Agree to consider possibilities of collaboration in life-science and environmental technology fields.
Trade and investment promotion
Agree to have JETRO and the Singapore TDB hold joint seminars and trade and investment missions and to consider cooperation such as database-sharing.
Working holidays Agree to consider working holidays. Twinning agreement Consider possibility of �gsister-city�h tie-ups between commercial areas.
(2) Bilateral cooperation
Other SMEs, HRD, media and broadcasting, tourism, transport, etc.
Holding consultations Ensure close bilateral collaboration by holding consultations regularly and frequently. At these consultations, encourage each other to take measures to improve both countries�f business environments.
Dispute settlement procedures
Creation of bilateral dispute settlement procedures.
(3) Consultation and dispute settlement
Alternative Dispute Resolution
Agree to promote use of alternative dispute resolution mechanisms.
Source: Created based on the Japan-Singapore Joint Study Group Report.
Industrial Development (currently the Ministry of Economy, Trade and Industry) on a free trade agreement, with both sides releasing reports171 in April 2000. Subsequently,
171 The JETRO report noted that as (1) promoting bilateral and regional FTAs would complement multilateral negotiations and (2) a Japan-Mexico FTA would have a substantial effect in terms of expanding trade and investment and could contribute to closer Japan-Mexico economic ties, maximum effort should be made to create a basic framework as soon as possible, while bearing in mind the impact on domestic industry. The merits of an FTA with Mexico were identified as (1) the great significance of such an agreement as an opening into the North American market and (2) the way in which an FTA would counteract the measures taken in 2000 to effectively eliminate Maquiladora zones (bonded industrial areas) for NAFTA. The report by the Mexican Ministry of Commerce and Industrial Development observed that the wide range of FTAs which Mexico has already concluded would provide Japan with the possibility of being able to gain preferential access to the North American, Latin American and European markets, and proposed that a bilateral investment treaty be concluded immediately and Japan-Mexico FTA negotiations launched.
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Figure 4.3.29 Trends in bilateral efforts
Country Year Month Main developments Korea Oct. “Strengthening of economic cooperative ties” included in annex to the Japan-ROK Joint Declaration Nov. Discussion on a Japan-ROK FTA at the first Gathering of Japan-Korea Cabinet Ministers
1998
Dec. Inauguration by the private sector in both countries of the Study Team "Toward closer Japan-Korea Economic Relations in the 21st Century", launching of joint research
1999 March Announcement of the Japan-ROK New Agenda for Economic Partnership at a Japan-ROK Summit Release of a joint research report by the above team
May Joint symposium held by the above team
Agreement by the above group to the early establishment of a Japan-ROK FTA Business Forum and launching of considerations in this forum
2000 Sept.
Joint symposium held by the above group
Mexico 1998 Nov. Mexican President visits Japan, proposes consideration of a Japan-Mexico FTA and investment treaty
Feb. Based on the President’s proposal, Committee for Closer Economic Relations Between Japan and Mexico formed (non-governmental base)
1999
April Keidanren releases Report on the Possible Effects of a Japan-Mexico Free Trade Agreement on Japanese Industry
JETRO and the Mexican Department of Commerce jointly release a report
April Keidanren Japan-Mexico Businessmen’s Joint Committee Meeting releases Joint Statement
Regarding the Early Commencement of Negotiations Leading to a Free Trade Agreement Between Japan and Mexico
Oct. The New Japan-Mexico Commission for the 21st Century proposes launching government-level research on an FTA
2000
Nov. Keidanren releases Results of a Questionnaire Survey on the Need for a Japan-Mexico FTA
2001 Jan. Minister Hiranuma visits Mexico. Mexican Minister of Commerce proposes the early launching of negotiations on a Japan-Mexico FTA.
Chile 1999 Nov. External Relations Minister Juan Gabriel Valdez visits Japan, announces that Chile wants to launch research on a Japan-Chile FTA.
Feb. Chilean Vice-Minister for International Economic Relations of the Ministry of Foreign Affairs Jara visits Japan (proposes joint research with JETRO)
May Inauguration of the JETRO Japan-Chile FTA Study Group.
2000
June The JETRO Study Group holds a seminar 2001 March The JETRO Study Group to release a report.
Australia Oct. Agreement reached between Minister Hiranuma and the Australian Trade Minister to engage in wide-ranging discussion at the private-sector level concerning measures to strengthen bilateral economic relations for a new era.
2000
Nov. Private-sector research groups established in both countries. 2001 March Research to be concluded.
Note: As at February 2001. Source: METI research.
during then-MITI Minister Hiranuma’s visit to Mexico in January 2001, then-Economic Minister Derbez suggested that early FTA negotiations be launched. Both governments therefore gave consideration to starting study groups on a wide-ranging agreement, with the purpose of these groups being to deepen awareness on both sides. Investment treaty negotiations began in 1999, and both countries are in the midst of intensive consultations. Not only is Mexico a NAFTA member, but its FTA with the EU went into force in July 2000, pitting Japanese companies which export to or have affiliates in Mexico up against increasingly stiff competition. To redress this situation, Keidanren has announced that it hopes to see the successful conclusion of the investment treaty currently under negotiation, as well as the early conclusion of an FTA172.
172 Keidanren (2000b).
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(Korea) In response to discussion on a Japan-Korea FTA at the first Gathering of Japan-Korea Cabinet Ministers in November 1998, the 21st Century Japan-Korea Economic Relations Study Team was launched in December. Comprising IDE-JETRO and the Korea Institute for International Economic Policy (KIEP), the team began joint research on a bilateral FTA. Both reports were released in May 2000 with a joint communiqué, noting that while a Japan-Korea FTA would raise various concerns, it would also offer considerable merits in terms of improving the world trade balances of both countries (increasing their surpluses), eliminating tariffs and also attracting foreign investment, promoting competition and boosting productivity. In the Summit talks held during President Kim’s visit to Japan in September 2000, leaders agreed to establish a Japan-Korea FTA Business Forum. Drawing its membership primarily from economic circles, the forum is intended to spur public debate in both countries on a bilateral FTA. Negotiations on a Japan-Korea investment treaty, launched in 1999, are still underway toward the development of transparent, viable high-level disciplines. (Chile) Chile is working actively to develop cross-regional FTAs, with agreements already in place with countries such as Canada and Mexico and negotiations begun with the US, EU, EFTA and Korea. When Foreign Minister Valdez visited Japan in November 1999, he proposed launching research on the conclusion of a Japan-Chile FTA, resulting in joint research between JETRO and the Chilean Ministry of Foreign Affairs. The group began its work in May 2000, and is expected to release a report in March 2001173. (Australia) In October 2000, then-MITI Minister Hiranuma and Australian Trade Minister Mark Vaile affirmed that Japan and Australia were important partners in the Asia-Pacific and agreed to have the private sector study and consider the possibilities for a wide range of measures to strengthen bilateral economic relations for a new age. Based on this agreement, the two countries have set up private-sector study groups to handle this work, with their conclusions expected to be presented in March. (5) External economic policy challenges in the 21st century The above sub-sections examined the environment in which Japan’s external economic policy is located and the need to develop multi-layered external economic policy. In conclusion, we turn to essential conditions in maximizing the effect of these policies. (a) Ensuring consistency with the WTO Agreement The first challenge in advancing Japan’s multi-layered external economic policy
173 As at February 2001.
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Figure 4.3.30 Requirements for WTO Agreement legitimization of regional integration
GATT Article XXIV (Customs Unions and Free Trade Areas) GATS Article V (Economic Integration) Areas covered
Substantially all the trade between the constituent territories of a free-trade area in products originating in such territories (Article XXIV, 8 (b))
Substantial sectoral coverage (Article V, 1 (a))
Measures covered
Elimination of duties and other restrictive regulations of commerce with respect to the trade defined above (Article XXIV, 8 (i)) (Note 1)
Elimination of substantially all discrimination in the sense of Article XVII (National Treatment) between or among the parties, in the sectors covered (Article V, 1 (b)) (Note 2)
Transition period
Any interim agreement … shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time (Article XXIV, 5 (c)). The "veasonable length of time" should exceed 10 years only in excwptional cases (Understanding on the Interpretation of article XXIV of the general agreement on tariffs and trade 1994, Paragraph 3).
Absence or elimination of substantially all discrimination either at the entry into force of the agreement or on the basis of a reasonable time-frame (Article V, 1 (b)). (Note 3)
Barriers to non-parties
These may not be higher or more restrictive than “the general incidence of the duties and regulations of commerce” or “the corresponding duties and other regulations of commerce” applicable or existing in the constituent territories prior to the formation of the free-trade area, or interim agreement (Article XXIV, 5 (b).
The overall level of barriers to trade in services within the respective sectors or subsectors may not be lifted in respect of any Member outside the agreement compared to the level applicable prior to such an agreement. (Article V, 4).
Notes: GATT Article XXIV is entitled Customs Unions and Free Trade Areas, GATS Article V Economic Integration, with GATS making provision for more advanced modes of integration (for example, GATS Article V (2) Labour Markets Integration Agreements recognizes labor market integration-related measures not covered under GATT. 1. With the exception of measures recognized under GATT Articles XI (General Elimination of Quantitative Restrictions), XII (Restrictions to Safeguard the Balance of Payments), XIII (Non-discriminatory Administration of Quantitative Restrictions), XIV (Exceptions to the Rule of Non-discrimination), XV (Exchange Arrangements), and XX (General Exceptions). 2. With the exception of measures recognized under GATS Articles XI (Payments and Transfers), XII (Restrictions to Safeguard the Balance of Payments), XIII (Government Procurement), XIV (General Exceptions) and XIV (2) (Security Exceptions). 3. At this point in time, no consensus has been reached on the specific period of time denoted by “a reasonable time-frame”. Source: Created by METI.
will be to ensure WTO consistency in concluding bilateral and regional agreements. FTAs which reduce tariff and non-tariff barriers for certain countries only are permitted under the WTO Agreement as exceptions to the MFN principle. While the intention is that a worldwide trend toward FTA-led trade liberalization will contribute to the eventual expansion of world trade, certain conditions are placed on countries concluding FTAs to prevent the hollowing-out of the MFN principle. In terms of trade in goods, for example, GATT Article 24 stipulates that (1) effectively all trade-related tariffs and other restrictive trade regulations must be eliminated among FTA parties174; (2) the transition period for this elimination must be no more than 10 years in principle; and (3) tariffs and other trade regulations imposed on countries outside the agreement must not be high or restrictive. GATS Article 5 has similar provisions for services (Fig. 4.3.30). For Japan to continue to enjoy the benefits of the multilateral trading order which the WTO provides, and to maintain its international credibility, Japan must ensure that any bilateral or regional EPAs or other agreements which it forms conform with the WTO Agreement. Maximizing the effect of its multi-layered external economic policies will also necessitate not just ensuring this conformity, but also meeting the conditions indicated in points (2) and (3) above.
174 See Understanding on the Interpretation of article XXIV of the general agreement on tariffs and trade 1994, Paragraph 3
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(b) Swift negotiations FTA negotiations have been speeding up in recent years, with at least two of the negotiations started in 2000 signed in around five months (Fig. 4.3.31). This acceleration is an essential element in setting de facto standards in terms of trade rules, as well as in successfully establishing a regional trade and investment base, the advantage offered to a first-comer. Fast negotiations are also vital in forming agreements which match dramatically-changing technology and consumer needs. The second challenge in Japan’s pursuit of multi-layered external economic policy will therefore be to build speed into its negotiation of EPAs, BITs and other agreements. While ensuring both WTO consistency and speedy negotiations will be far from easy, both conditions must be met in order for Japan to revive the domestic economy from its occlusion as soon as possible while maintaining the credibility of the WTO. (c) Organic linkages among fora The third challenge will be to maximize utilization of the experience, know-how, human resources and other resources which Japan has cultivated through the WTO negotiations in its bilateral and regional arrangements, as well as to develop organic linkages among the various layers, feeding back into the WTO the harvests and experiences drawn from bilateral and regional negotiations. These linkages will be a vital condition in achieving the above-mentioned goal of speedy negotiations.
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Figure 4.3.31 Comparison of negotiation periods for main FTAs
Negotiation period (Approx)
Announcement/commencement of negotiation
Signature of agreement
US-Jordan 5 mths Announced 6 June 2000 24 October 2000 EFTA-Mexico 5 mths Launched 6 July 2000 27 November 2000 Singapore-NZ 1 yr Launched 11 November 1999 14 November 2000 EU-Mexico 1 yr, 5 mths Launched 9 November 1998 24 March 2000 Chile-Canada 1 yr Launched 24 January 1996 05 December 1996 EFTA-Morocco 1 yr, 7 mths Announced 8 December 1995 19 June 1997 NAFTA 1 yr, 7 mths Launched 11 June 1991 17 December 1992 US-Canada 2 yrs, 4 mths Announced September 1985 02 January 1988 US-Israel 1 yr, 5 mths Announced 29 November 1983 22 April 1985 NZ-Australia 2 yrs, 10 mths Launched March 1980 01 January 1983 US-Singapore Initial goal of completion by end of 2000 Launched 4 December 2000 Under negotiation FTAs and BITs concluded or under negotiation by Japan (reference)
Negotiation period (Approx.)
Announcement/commencement of negotiation
Signature of agreement
Japan-Singapore FTA Aiming at the end of 2001 Launched January 2001 Under negotiation Japan-Egypt BIT 1 yr, 3 mths Launched November 1975 28 January 1977 Japan-Sri Lanka BIT 1 yr Launched March 1981 01 March 1982 Japan-China BIT 7 yrs, 4 mths Launched May 1981 27 August 1988 Japan-Turkey BIT 5 yrs Launched February 1987 12 February 1992 Japan-Hong Kong BIT 3 yrs, 1 mths Launched April 1994 15 May 1997 Japan-Bangladesh BIT 4 yrs, 5 mths Launched July 1984 10 November 1998 Japan-Russia BIT 10 mths Launched February 1998 13 November 1998 Japan-Mongolia BIT 1 yr, 5 mths Launched October 1999 15 February 2001 Japan-Saudi Arabia BIT 3 yrs, 3 mths to date Launched December 1997 Under negotiation Japan-ROK BIT 1 yr, 6 mths to date Launched September 1999 Under negotiation Japan-Vietnam BIT 1 yr, 6 mths to date Launched September 1999 Under negotiation Japan-Mexico BIT 1 yr, 5 mths to date Launched October 1999 Under negotiation Japan-Indonesia BIT 7 mths to date Launched July 2000 Under negotiation
Notes: As at February 2001. Negotiations were considered to have started with the first round of negotiations (“launched”) or when an official government announcement was made (“announced”). Source: METI.
